UK services sector activity plunges to steepest decline in a decade | service sector

Britain’s major services sector companies have reported the sharpest decline in business activity in a decade, according to a closely watched index.

The report said businesses are grappling with a “perfect storm” of domestic political uncertainty surrounding Prime Minister Keir Starmer’s leadership and the growing impact of the Iran war, which is causing soaring costs, supply shortages and job losses.

According to the S&P Global Purchasing Managers’ Index (PMI), which surveys hundreds of companies across the UK each month, activity among companies in the services sector was the weakest since January 2021 and the lowest since July 2016, excluding the period of the Covid-19 pandemic.

From hospitality and retail to finance and IT, the services sector makes up around 80% of the UK economy. This means that the performance of the services sector has a significant impact on GDP growth.

The recession has had an impact on PMI’s “Comprehensive Production Index,” which measures the performance of private companies in the manufacturing and service sectors, with a reading above 50 indicating growth in business activity and below indicating contraction.

It scored 48.5 points in May, down from 52.6 points in April. That was much worse than the 51.6 score economists predicted and the lowest since April 2025.

Andrew Wishart, an economist at German bank Berenberg, said that if the PMI’s sluggish performance continued, it would mean a “collapse in GDP growth”, extending from a 0.6% increase in the first quarter of the year to -0.2% in the second quarter.

“The most important culprit is the war in the Middle East, but companies are pointing to domestic politics as increasingly damaging, increasing uncertainty and ultimately suppressing spending, hiring and investment,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.

The index also showed that private sector payroll figures have declined for the 20th consecutive month due to “accelerating pace of job loss” in the services sector. This reflects data released by the Office for National Statistics this week, which showed the number of employees on payroll fell by 100,000 in April, falling at the sharpest pace since 2014, after falling by 28,000 in March.

The decline in services sector activity was greater than the recovery in UK manufacturing. The companies said customers were “frontloading” orders to overcome future price increases and potential supply disruptions. This contributed to manufacturing activity accelerating to a three-month high despite some supply chain issues arising from international shipping delays in the Gulf region.

However, a separate report from the Federation of British Industry found that manufacturers reported their lowest order levels since 2020 in May and demand was expected to fall further over the next three months, suggesting the situation for the sector is mixed.

Economists said the May PMI survey was the latest data to suggest the Bank of England may hold off on delaying a rate hike from 3.75% at its next meeting in June. Official figures this week showed Britain’s inflation rate slowed from 3.3% in March to 2.8% in April and wage growth also slowed to 3.4%, suggesting the UK economy is not yet suffering from an inflationary runaway.

“May’s flash PMI is the third reading in three days that suggests the Bank of England is in no rush to raise interest rates, as it shows weakening economic activity may be starting to curb price rises,” said Paul Dales, chief UK economist at Capital Economics.

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