UK services slip into contraction

The UK services sector contracted in May for the first time since April 2025, as weaker demand, rising costs, and subdued confidence placed fresh pressure on the part of the economy most closely tied to domestic growth.

S&P Global said its UK Services PMI Business Activity Index fell from 52.7 in April to 49.3 in May, moving below the 50.0 no-change threshold. The final reading was above the flash estimate but still marked a reversal after a more resilient start to spring.

Based on responses from around 650 service-sector companies, the survey found that output and new work both weakened during the month. Lower business activity was linked to subdued consumer spending, particularly in travel, tourism, and leisure, while some companies reported that economic and political uncertainty had delayed investment decisions.

New work fell for a third consecutive month, although only marginally. Concerns over the Middle East conflict, weaker discretionary spending, softer export sales, and intense competition in overseas markets all weighed on order books.

Employment also came under strain. With fewer new projects replacing completed work, service providers recorded a sustained decline in unfinished business. Backlog depletion was the fastest since November 2025, while payroll numbers fell solidly and job shedding reached its strongest rate since February.

Tim Moore, economics director at S&P Global Market Intelligence, said: “UK service sector companies signalled a reversal of fortunes in May as business activity fell into contraction after showing some resilience earlier this spring. Subdued business and consumer demand, across both domestic and overseas markets, was cited as holding back performance.”

He added: “Many service sector companies noted that the Middle East conflict had an adverse impact on sales pipelines and general business prospects. Those in the hospitality and transportation sectors typically commented on squeezed discretionary spending and pressure from sharply rising input costs, while professional services firms reported a setback from rising risk aversion among clients. Business investment spending on technology services remained a bright spot for parts of the service economy, however.”

Cost pressure remained elevated. Around 51% of the survey panel reported higher input prices in May, while only 2% reported a reduction. Higher operating expenses were overwhelmingly attributed to rising energy, fuel, and transportation bills, alongside wage and technology costs.

Companies continued to lift prices, although the rate of charge inflation eased from April’s 39-month peak. Many respondents said they were still trying to pass on higher fuel and payroll costs, leaving customers exposed to fresh price pressure even as demand weakened.

The wider private sector also lost momentum. The UK Composite PMI Output Index dropped from 52.6 in April to 49.7 in May, falling below the neutral 50.0 threshold for the first time in 13 months. Lower service-sector output more than offset faster growth in manufacturing production.

Confidence weakened alongside activity. Expectations for the year ahead were the least upbeat since April 2025, with companies citing hopes of more favourable market conditions but also continued concern over inflation, the Middle East conflict, and squeezed consumer budgets.

The service-sector data sits alongside signs of a cooling labour market, with vacancies falling, payrolls weakening, and lower-paid consumer-facing sectors showing early strain. The PMI adds a demand-side pressure point to that picture: companies are still facing cost inflation, but fewer are seeing enough new work to support hiring, expansion, or confident pricing decisions.

Services account for most UK economic output, which gives even a modest contraction wider weight. The detail behind the headline number is sharper than the fall below 50.0 alone. New orders have declined for three months, backlogs are being worked down, hiring has weakened, and confidence has reached a 13-month low.

That combination leaves management teams with competing pressures. Price rises may protect margins where costs remain high, but could suppress demand further in categories where consumers and clients are already delaying spending. Headcount reductions can control near-term costs, but may weaken capacity if demand recovers. Investment delays may preserve cash, but risk slowing adaptation in sectors where technology, automation, and service expectations are changing quickly.

The Bank of England will also be watching the balance between activity and inflation. Weak services demand points towards slowing growth, while persistent service-sector costs and price rises complicate the case for monetary easing. The survey suggests an economy operating in a narrow corridor, with inflation, confidence, and labour-market caution feeding into one another.

May’s data does not yet point to a steep downturn, but it does show that the largest part of the UK economy has lost momentum. Whether that becomes a temporary setback or a broader slowdown will depend on consumer confidence, business investment, fuel and energy costs, and the extent to which employers continue reducing payrolls through the summer.