The UK's services sector experienced a significant rebound at the start of 2026, with business activity reaching a five-month high, according to the latest survey data. This upturn is attributed to increased confidence following the autumn budget, though it coincides with a concerning trend of job losses that has now persisted for 16 years.
PMI Survey Reveals Strong Growth in January
The closely watched S&P Global UK services PMI survey recorded a reading of 54.0 in January, a notable increase from 51.4 in December. Any figure above 50.0 indicates expansion within the sector, making this the fastest period of growth since August of the previous year. The survey incorporates responses from hundreds of companies across diverse areas including hospitality, entertainment, finance, insurance, real estate, and business services.
Drivers of the Rebound
Respondents to the survey highlighted several key factors behind the improved performance. Greater confidence among customers, the initiation of new projects, and a heightened willingness to spend and invest were all linked to the clarity provided by the government's autumn budget in November. Tim Moore, economics director at S&P Global Market Intelligence, noted that this "post-budget clarity" contributed to a broader improvement in client confidence, with some firms also citing rising export sales as a positive influence.
Persistent Challenges and Job Shedding
Despite the encouraging growth in activity, the sector continues to face significant headwinds. Many firms reported that uncertainty surrounding geopolitical tensions and fragile consumer demand, constrained by squeezed disposable incomes, weighed on growth in January. Moreover, the PMI survey revealed a troubling employment trend: job numbers have been decreasing since October 2024, marking the longest period of job shedding in 16 years, with the rate of decline accelerating compared to December.
Cost-cutting measures and an increased reliance on automation were cited as primary reasons for firms reducing their workforce sizes. Separate analysis from the National Institute of Economic and Social Research (Niesr) indicated that lower-paid industries, such as hotels, hospitality, and food chains, are particularly vulnerable to rising labour costs, prompting businesses to slow their hiring rates.
Economic Implications and Interest Rate Outlook
Thomas Pugh, chief economist at RSM UK, described the figures as signalling a "decent post-budget bounce in activity" as budget uncertainty dissipates. He suggested that signs of a growth rebound in the first quarter, a recurring pattern in the UK economy, may lead the Monetary Policy Committee (MPC) to delay further interest rate cuts until April. Pugh emphasised that overall growth this year will largely depend on consumers' willingness to increase their spending.
The Bank of England is widely anticipated to maintain interest rates at 3.75% in its upcoming announcement. This decision reflects the complex balancing act between supporting economic expansion and addressing underlying challenges in the labour market and consumer demand.
