UK services rebound but employment remains weak

Britain’s services sector returned to growth in July as domestic orders improved, inflationary pressures eased, and business confidence reached its strongest level for five months.

The headline S&P Global UK Services PMI rose to 52.1 from 48.8 in June. A reading above 50 indicates expansion, while a figure below that level signals contraction.

The final result was also higher than the preliminary estimate of 51.8 and marked the first rise in service-sector activity since April. New work increased for the first time since February, ending four months of falling orders.

Companies linked the improvement to stronger consumer spending and demand for technology services. Export orders continued to decline for a fifth month, although the fall was the weakest during that period and some respondents reported improved sales to European customers.

The labour market remained the principal weakness. Employment fell for a 22nd consecutive month, although the rate of job losses eased to its slowest since October 2025. Businesses continued to report spare capacity and declining backlogs, reducing pressure to recruit even as activity recovered.

The divergence between output and employment indicates that companies are meeting higher demand through existing teams, productivity improvements, or delayed hiring. It may also reflect caution after several months of weaker orders, as employers wait for evidence that the recovery can be sustained before expanding payrolls.

Recruitment decisions can lag changes in demand because the cost of taking on permanent staff extends beyond the initial salary. Employers may first increase hours, use contractors, reorganise workloads, or delay replacing departing employees before committing to additional headcount.

Cost pressures moderated during the month. Input-price inflation slowed for a third successive month to its lowest level since February, helped by lower fuel and gas costs. Prices charged by services businesses increased at the weakest rate for five months.

Tim Moore, economics director at S&P Global Market Intelligence, said: “UK service providers moved back into growth mode during July.”

The improvement follows a mixed picture in the manufacturing economy. July’s manufacturing survey showed continued expansion but slower overall growth, while the services data suggest the larger part of the UK economy began the third quarter with greater momentum.

The combined services and manufacturing measure rose above the expansion threshold, strengthening evidence that private-sector activity recovered after weakness during the second quarter. Survey data are published before most official output figures and are frequently used as an early indicator of changes in economic direction.

The renewed increase in orders offers some reassurance to companies dependent on discretionary spending and business investment. Technology providers, hospitality operators, professional services companies, transport businesses, and communications groups are all represented in the survey, making the index a broad measure of commercial conditions.

Demand was not evenly distributed, however. Continued weakness in overseas orders leaves internationally exposed service providers dependent on domestic clients, while companies serving households remain sensitive to disposable income, borrowing costs, and consumer confidence.

The continued decline in employment limits the strength of the recovery. Prolonged reductions in headcount can weaken household confidence and restrict companies’ ability to respond when demand improves. They can also indicate that employers are absorbing higher wage, tax, property, finance, or compliance costs by reducing recruitment.

Companies that have reduced their workforce over an extended period may eventually encounter capacity constraints if orders continue to improve. Rebuilding teams can take time, particularly in professional, technical, and digital services where specialist skills are scarce or employees require training before becoming fully productive.

Lower input inflation provides some relief, particularly to businesses exposed to energy and transport costs. Slower increases in selling prices may also reduce pressure on customers, although they leave companies with less scope to protect margins where labour or other operating costs remain elevated.

The balance between volume and pricing will therefore remain important. A company can report higher activity while experiencing weaker profitability if new work is won through discounts or if costs continue to increase faster than the prices charged to clients.

Business expectations improved for a second month. Around 45% of surveyed companies anticipated higher activity during the coming year, compared with 15% expecting a decline. Respondents cited stronger sales pipelines, hopes of greater global stability, easing inflation, and renewed investment.

The data do not yet establish a sustained expansion. Export demand remains subdued, backlogs are falling, and employers are still reducing staff. July instead shows a sector emerging from contraction with improved orders and confidence, but without the capacity pressure that would normally support broad-based hiring.

Further PMI releases and official output data will indicate whether the rebound carried into August. A durable recovery would require new work to continue rising, overseas demand to stabilise, and companies to invest in people and additional capacity.