The UK's service sector has suffered one of its sharpest declines in activity for a decade, according to a closely watched survey, raising fresh concerns about the health of the economy.
Sharp Contraction in May
The S&P Global/CIPS UK services PMI business activity index fell to 47.2 in May from 51.1 in April, marking the steepest contraction since January 2021, when the country was in a Covid-19 lockdown. Any reading below 50 indicates contraction.
The downturn was driven by a sharp drop in new orders, as clients delayed or canceled projects due to economic uncertainty. Employment also fell for the first time in six months, with firms citing a lack of confidence in the economic outlook.
Broader Economic Implications
The services sector accounts for around 80% of UK economic output, so the decline is a significant blow to the country's growth prospects. The composite PMI, which includes manufacturing, also fell to a 13-month low of 48.5 in May, from 51.2 in April.
Economists warned that the data increased the risk of a recession in the second quarter. “The UK economy is losing momentum at a worrying pace,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.
The Bank of England is now under pressure to cut interest rates to stimulate growth, but inflation remains above its 2% target, limiting its room for maneuver.
Businesses reported that the cost of living crisis and higher borrowing costs were weighing on consumer demand. The survey also showed that input cost inflation eased, but firms continued to pass on higher costs to customers.
The government said it was taking action to support the economy, but opposition parties blamed the government's policies for the downturn.
