UK’s service sector PMI for May has been revised to 50.9 from a preliminary 50.2, indicating a small improvement from April’s 49.0. The Composite PMI also increased to 50.3 from an initial estimate of 49.4, up from 48.5 in the previous month. Business activity has seen a slight uptick, with optimism reaching its highest level in seven months. However, new orders and employment numbers continue to decline, highlighting ongoing challenges in the sector.

Decline in New Orders

Total new orders have dropped due to cuts in business and consumer spending. The service sector has experienced eight consecutive months of employment declines, the longest stretch of job losses since 2008-10, excluding the pandemic years. Input costs rose mainly due to higher wages, although the inflation rate slowed from April’s peak. Competitive pressures led to the slowest increase in service prices since October 2024. This update shows that while overall activity in the service sector has slightly improved, demand remains weak and is putting pressure on businesses. A PMI reading above 50 indicates expansion, but just barely crossing that mark suggests more stability than strong growth. There’s a noticeable gap between business expectations and real demand. Confidence among service providers has risen, reaching its highest point in over six months. This optimism may be driven by hopes of lower interest rates or easing inflation in the future. However, this renewed confidence contrasts with ongoing job cuts and a further drop in new orders, indicating that businesses remain cautious about hiring and spending.

Continued Reduction in Employment

The ongoing reduction in employment has now lasted for eight months, signaling that profit margins are still under pressure and businesses are reluctant to increase wages. This level of sustained job loss hasn’t been seen in over a decade, excluding the unusual circumstances of 2020 and 2021, which highlights the stress in certain areas of the sector. Price data indicates a slight easing. Input costs have risen, mainly due to increased wage demands, but the pace of growth has slowed compared to April. Companies have also reduced price increases, resulting in the weakest rise in service charges in over six months. Many businesses are choosing to absorb higher costs rather than pass them on, aiming to maintain their position in a challenging demand environment. Looking ahead, it is essential not to be misled by the slight PMI increase. Focus on forward-looking factors such as hiring plans, pricing trends, and the gap between expectations and current activity will shape the coming weeks. While the PMI rise may temporarily boost sentiment, this is unlikely to last without confirmation from broader consumer spending or business investment data. As policy approaches a potential turning point, the response to minor economic data changes will be more sensitive. Volatility may increase with minor data fluctuations. It’s essential to stay agile until there are clear signs of improvement, rather than relying solely on appearances. Create your live VT Markets account and start trading now.

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