The UK's vast services sector, which contributes nearly 80% of the nation's economic output, is undergoing a significant labour market transformation. A key survey reveals that companies are cutting jobs at an accelerated pace, opting for automation over hiring, even as business activity shows robust growth.
Longest Period of Job Shedding in 16 Years
The latest S&P Global Purchasing Managers' Index (PMI) for the services sector indicates that employment numbers fell more sharply in January compared to December. This decline continues a trend that began in October 2024, marking what the survey describes as the longest period of job shedding in the UK services sector in 16 years.
Firms are reportedly not replacing staff who leave voluntarily, a decision driven by several factors. Anecdotal evidence from the survey suggests companies are increasingly turning to automation to address staffing shortfalls and boost productivity. This shift is occurring alongside squeezed profit margins and fragile market conditions, which are also influencing hiring strategies.
Economic Pressures and Labour Costs
Tim Moore, Economics Indices Director at S&P Global Market Intelligence, commented on the findings, stating, "There were again gloomy signals for the UK labour market outlook as staff hiring decreased at a steeper pace in January as firms looked to offset rising payroll costs."
These payroll pressures include rises in the national living wage and increases in employers' national insurance contributions implemented since last April. Industries with large numbers of entry-level positions, such as hospitality and some administrative roles within professional services, have been particularly affected.
The broader economic context is one of widespread rising costs, including higher energy and food prices. Additionally, a recent shake-up of business rates is expected to push up bills for some companies, leading to criticism of government policy from the business community.
Business Activity Rebounds Despite Job Cuts
Paradoxically, while jobs are being cut, business activity in the services sector has rebounded strongly. The PMI survey showed output rising to a balance of 54 in January, up from 51.4 in December. This represents the fastest pace of expansion since August, with any reading above 50 indicating growth.
The sector got off to a good start in 2026 after a weak final quarter, with activity reaching a five-month high. When combined with January's PMI data for manufacturing, the overall reading for UK business activity hit a 17-month high.
Improved Sentiment and Investment
Part of this improvement in activity is attributed to a lift in business sentiment. The budget in late November 2025 ended months of speculation about potential tax rises, allowing delayed projects and investments to proceed. Expectations for future business activity are now at their strongest since October 2024.
This is notable given that the Chancellor, Rachel Reeves, imposed significant tax rises on companies in her first budget that October, despite concerns from businesses about geopolitical risks and weak consumer demand.
The Automation Imperative
The survey's release coincides with growing investor focus on the implications of artificial intelligence and automation. For instance, recent announcements from AI company Anthropic about its Claude chatbot's ability to automate legal work sent shares in related publishers and data companies falling sharply. This sell-off began in London and rippled through global markets.
The services sector encompasses a wide range of industries, from hotels and catering to legal and financial firms. The move towards automation appears to be a strategic response to cost pressures and a drive for efficiency, reshaping the workforce within this critical pillar of the UK economy.
