UK Services Growth Slows as Rising Costs and Weak Demand Limit Momentum

The UK services sector continues to expand, but growth is losing momentum as cautious consumer spending, higher borrowing costs and geopolitical uncertainty weigh on demand. At the same time, rising fuel and payroll costs are putting renewed pressure on businesses, creating a more difficult environment for both margins and employment.

The latest S&P Global UK Services PMI stands at 52.1, slightly above the preliminary estimate of 51.7 but below August’s 52.5. The reading remains above the 50.0 level separating expansion from contraction, but the underlying trend points to a services economy operating with limited momentum.

Market Snapshot

Services Growth Remains Positive but Loses Momentum

The UK services sector remains in expansion territory, but the pace of growth is becoming increasingly subdued.

New business is rising only modestly and is recording its weakest growth in three months. Businesses continue to face pressure from cautious clients, tighter household budgets and elevated financing costs.

Geopolitical tensions are also encouraging some customers to delay commitments, while uncertainty surrounding the wider economic outlook continues to influence spending decisions.

Technology-related services remain one of the stronger areas of demand, providing an important source of resilience within the broader services economy.

Consumer Demand and Borrowing Costs Remain Key Risks

The UK economy remains sensitive to the combination of weak consumer confidence and elevated financing costs.

Higher borrowing costs continue to affect households and businesses, particularly in interest-rate-sensitive sectors. Real estate and construction demand remains weak, while companies are becoming more selective about investment and hiring.

The easing in client risk aversion provides some support, but it has not yet translated into a strong acceleration in new business.

For the services sector, the next stage of growth is therefore likely to depend heavily on whether domestic demand can strengthen while inflationary pressures begin to moderate.

Employment Remains Under Pressure

Employment remains one of the weaker components of the UK private-sector economy.

Services companies continue to reduce headcount, extending a period of job losses that has now reached approximately two years. However, the latest decline has eased to its slowest pace since October 2025.

That moderation is encouraging, but it does not yet represent a clear turnaround in the labour market.

If demand remains subdued, businesses may continue to prioritise productivity and cost control rather than expanding their workforces. This could keep employment growth weak even if headline economic activity remains positive.

Rising Costs Create a New Inflation Challenge

Input-cost inflation is becoming an increasingly important concern.

Higher fuel prices, payroll expenses and broader operating costs have pushed input-price inflation to its strongest level since June. Businesses are responding by raising the prices they charge customers, producing the sharpest increase in output prices since May.

This creates a difficult policy environment for the Bank of England.

If cost pressures remain elevated, the central bank may have less flexibility to ease monetary policy aggressively. At the same time, weak employment and slowing economic activity argue for a more supportive policy stance.

The balance between inflation and growth therefore remains critical for sterling and UK interest-rate expectations.

UK Composite PMI Signals a Broader Slowdown

The wider private sector is also expanding at a slower pace.

The UK Composite PMI is currently 52.0, down from 52.5 and representing a three-month low. Services growth has slowed, although manufacturing has improved to 51.9 and continues to expand for an 11th consecutive month.

New business growth across the private sector has become marginal, while backlogs of work continue to decline.

The prolonged reduction in outstanding work suggests that companies are not yet seeing enough demand to generate a meaningful build-up of future activity.

Bullish Scenario

A stronger outlook for the UK could develop if consumer demand improves, technology services remain resilient and borrowing conditions become less restrictive.

A moderation in fuel and other input costs would also reduce pressure on corporate margins and selling prices.

If employment stabilises alongside improving new orders, business confidence could recover and support stronger private-sector growth.

For sterling, a combination of resilient activity and persistent inflation could maintain expectations for relatively firm UK interest rates and provide support against major currencies.

Bearish Scenario

The downside risk is that weak demand becomes more persistent while rising costs further squeeze corporate profitability.

Continued employment reductions, falling backlogs and weak construction and real estate activity would point to a more fragile underlying economy.

A renewed increase in energy prices could also reinforce inflation, creating a particularly difficult environment for the Bank of England by limiting the scope for rapid monetary easing while growth remains weak.

Under this scenario, sterling could come under pressure if markets begin to focus more heavily on deteriorating growth expectations.

UK Economic Outlook

The immediate outlook is one of modest expansion rather than strong acceleration.

Services activity remains above the 50.0 threshold, but slowing new business, declining employment and falling backlogs suggest that the underlying recovery is not yet broad-based.

The economy will increasingly depend on whether consumer spending improves and whether businesses can absorb higher costs without further reductions in employment or investment.

Inflation and Interest-Rate Outlook

The renewed acceleration in input costs is particularly important for the Bank of England.

Higher fuel and payroll costs are feeding through into prices charged by businesses, potentially keeping services inflation more persistent than policymakers would prefer.

However, the weaker growth environment creates an opposing force.

The coming economic data will therefore be important in determining whether the Bank of England can prioritise growth or must remain focused on inflation risks.

For financial markets, this tension could continue to produce volatility in UK gilt yields and sterling.

GBP Outlook

Sterling remains sensitive to the changing balance between UK growth, inflation and Bank of England policy expectations.

The latest PMI data provide neither a strong bullish growth signal nor evidence of a severe contraction. Instead, they reinforce the view that the UK economy is moving through a period of subdued expansion with persistent cost pressures.

Bullish GBP: stronger consumer demand, stabilising employment, resilient services activity and persistent inflation could keep UK rate expectations relatively firm.

Bearish GBP: weaker business activity, continued job losses, declining backlogs and deteriorating consumer demand could increase expectations for monetary easing and weigh on sterling.

The direction of GBP will therefore depend increasingly on whether inflation remains elevated enough to offset the deterioration in growth momentum.

Louis Roche Analysis

The latest UK PMI data present a mixed picture.

The headline services reading remains above 50, but the underlying components are less encouraging. New orders are slowing, employment continues to contract and backlogs are still declining. At the same time, businesses are facing renewed cost pressure from fuel and payroll expenses.

This combination is important because it creates a stagflationary risk at the margin: growth is losing momentum while businesses are simultaneously facing higher operating costs.

The technology services sector is providing some resilience, but it is not yet sufficient to offset the broader weakness in demand-sensitive areas.

For sterling, I would therefore expect the market to remain highly responsive to incoming inflation, employment and consumer-demand data. A sustained deterioration in growth could eventually become more important than elevated input costs, particularly if the Bank of England gains greater confidence that inflation is moving lower.

For now, the UK economy remains in expansion, but the quality of that expansion is becoming increasingly fragile.

Coming Sessions

Markets will focus on whether the UK economy can maintain positive growth while inflationary pressures remain elevated.

Key areas to watch include:

• UK inflation and services-price developments
• Labour-market conditions and wage growth
• Consumer spending and confidence
• Bank of England interest-rate expectations
• UK gilt yields
• GBP/USD and EUR/GBP price action
• Energy and fuel prices
• Construction and real estate activity
• New business and employment trends in future PMI releases

A continued slowdown in new orders alongside persistent cost inflation would increase pressure on the UK economic outlook. Conversely, stronger consumer and business demand could help stabilise growth expectations and provide support for sterling.

Currency Hedger View

Currency Hedger monitors sterling alongside global FX markets, interest-rate expectations, energy prices and broader macroeconomic conditions.

For UK businesses with international currency exposure, the combination of slower domestic growth and renewed cost inflation makes sterling risk particularly important. GBP movements could become more volatile as markets reassess the timing and pace of future Bank of England policy changes.

Businesses with significant GBP exposure should continue to monitor rate expectations, inflation developments and major GBP currency levels as the UK economic outlook develops.

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Contributor: Louis Roche – Today Markets

Market analysis prepared for Today Markets. For informational purposes only and not intended as investment, trading, financial or commodity advice.

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