Key Takeaways
- Britain’s services sector ended 2025 on a weaker footing than previously thought, with a Purchasing Managers’ Index (PMI) reading of 51.4 in December.
- The sector experienced higher input costs, driven by staff costs, raw materials, and fuel, which were passed on to consumers through higher prices.
- Business optimism is recovering, with improved consumer confidence and increased business investment, but firms expressed concerns about Britain’s economic outlook and weak demand overseas.
- Hiring declined for the 15th month in a row, although the pace of contraction slowed from November.
- The Bank of England (BoE) cut interest rates to 3.75% and sees persistently high services price inflation as limiting the pace at which it can cut borrowing costs.
Introduction to Britain’s Services Sector
The British services sector, which accounts for a significant portion of the country’s economy, ended 2025 on a weaker note than initially anticipated. According to the S&P Global UK Services Purchasing Managers’ Index (PMI), the sector’s performance was lackluster, with a reading of 51.4 in December, up from 51.3 in November but below the provisional reading of 52.1. This slowdown is concerning, given the sector’s importance to the overall economy. The PMI survey provides valuable insights into the sector’s performance, including business activity, new orders, employment, and prices.
Economic Indicators and Survey Results
The survey’s findings are consistent with other weak economic indicators released before and after the finance minister’s second budget in November. The budget included £26 billion in tax increases, although most of these increases were delayed. Britain’s economy contracted by 0.1% in the three months to October, and the Bank of England estimates that it stagnated in the fourth quarter. The PMI survey revealed that input costs for services firms rose in December at the fastest pace since May, driven by higher staff costs, raw materials, and fuel. As a result, firms increased their prices, with output charge inflation rebounding from November’s recent low.
Inflationary Pressures and Interest Rates
The survey’s findings suggest that inflationary pressures in the service economy strengthened at the end of 2025. The increase in input costs and prices charged by firms has significant implications for monetary policy. The Bank of England, which cut interest rates to 3.75% last month, sees persistently high services price inflation as limiting the pace at which it can cut borrowing costs. Investors are pricing in one or two quarter-point cuts in 2026, but the BoE’s ability to reduce interest rates further will depend on the trajectory of inflation. The minimum wage is set to increase by 4.1% in April, which may exert additional upward pressure on prices.
Business Optimism and Employment
Despite the challenging economic environment, business optimism is recovering, with respondents citing improved consumer confidence and increased business investment. However, firms expressed concerns about Britain’s economic outlook, rising business costs, and weak demand overseas. The survey also revealed that hiring declined for the 15th month in a row, although the pace of contraction slowed from November. The composite PMI, which combines the services sector survey with the manufacturing survey, rose to 51.4 from 51.2 in November, although this reading was below the provisional estimate of 52.1.
Conclusion and Outlook
In conclusion, Britain’s services sector ended 2025 on a weaker footing than previously thought, with higher input costs and prices charged by firms. While business optimism is recovering, concerns about the economic outlook and weak demand overseas persist. The Bank of England’s ability to cut interest rates further will depend on the trajectory of inflation, which is likely to remain a key challenge for policymakers in 2026. As the economy navigates these challenges, it is essential to monitor the services sector’s performance closely, given its significant contribution to the overall economy. The PMI survey will continue to provide valuable insights into the sector’s trends and outlook, helping policymakers and businesses make informed decisions.
