In May last year, all the talk was about how vibrantly the activity in the UK services sector was accelerating. What a difference a year makes as the latest S&P Global UK Services PMI Index for April 2025 dipped below 50, indicating that the sector was contracting. This ended a 17-month run of growth.

New order books at service companies shrank in April, driven down by the fastest decline in exports since February 2021 during the pandemic. UK exports look certain to be a victim of the turmoil in world trade precipitated by America’s tariff announcements.

Backward looking and superficially encouraging economic data on GDP recently published covers a period which pre-dates the chaos, disruption and uncertainty this has caused and which underly the poor PMI data. The trend for GDP is likely to head downwards from April onwards.

There is no way to overstate the importance of the service sector to the modern UK economy. According to research by the House of Commons Library, it represents 80% of UK economic output and provides 85% of our employment.

The S&P Global/CIPS Purchasing Managers’ Index (PMI)

The Services PMI is an index incorporating survey results on various aspects of activity provided by firms in the services sector throughout the country. It has been gathering data since 1992. Any reading above 50 suggests the sector is expanding, while a reading below 50 implies that the sector is in contraction. Policymakers and traders watch these surveys closely, not just based on their proven accuracy in predicting trends but because the data is real time, rather than historic.

• The reading for April 2025 was 49.0, sharply down from 52.5 in the preceding month and 54.9 a year earlier in April 2024.
• This compares with the long-term average of 53.2 between 2007 and 2024.
• By way of context, the all time high was 62.9 in May 2021, while the all time low was 13.4 in April 2020, both extremes being the direct result of the Coronavirus pandemic.

The news release accompanying the April 2025 PMI results commented that survey respondents widely commented on risk aversion and delayed spending decisions among their clients in response to rising global economic uncertainty. Despite some relaxation of the original hard-line tariff regime introduced by President Trump, the uncertainty for the UK services sector continues and is likely to do so for the foreseeable future.

Smaller domestic services businesses also said that the tax increases and other measures introduced by the Chancellor in last year’s Autumn Budget were weighing on costs and had prompted them to lay off workers at a faster rate since their introduction at the beginning of April 2025.

GDP

• Services output increased by 0.7% in the quarter to March 2025, following 0.1% growth in the previous quarter.
• Non-consumer-facing services (business-facing services) increased by 0.7% in quarter 1 2025, while consumer-facing services increased by 0.9%.
• Ten of the fourteen services sub-sectors rose. The major contributors to growth were administrative and support service activities (up 3.3%) and wholesale and retail trade including repair of motor vehicles and motorcycles (up by 1.6%).
• Pundits have rightly warned that much of the GDP growth may be from businesses pulling forward activity to get ahead of Trump’s tariffs, amid fears of tougher times ahead.
• In this scenario, the rise is more phasing than actuality.

Inflation

• Service sector inflation was down to 4.7% in March 2025 compared to 5.0%.
• It is generally accepted that this fall will reverse from April onwards, as the negative impact of the price rises driven by the Autumn Budget cost hikes takes effect, which will hit services companies particularly hard.

Business failures

• The worst affected service sub-sectors for insolvencies have long been hospitality, retail and professional services.
• Typically, they alone account for almost a third of total UK failures.
• Hospitality represented 14% of all insolvencies in the year to February 2025, while retail and professional services were 8% each.
• There is a strong possibility that the Autumn Budget measures will increase service sector failures, both in absolute numerical and in percentage terms.

Debt levels

• We have reported recently in detail on the finances and challenges of key service sectors. In the cases of the hotel industry, hospitality and retail, each sector has seen a major reduction of between a quarter up to more than a third in their borrowing levels during the past two years.
• In one sense this is a positive indicator of improving financial health and resilience. The major caveat is whether these reductions have been at the expense of investment.
• Hospitality and retail are both areas in which a failure to refresh and re-invent the customer experience can lead eventually to serious viability issues.

Prospects for 2025 and on into 2026

It will remain to be seen just how badly the Autumn Budget cost increases damage the UK services sector, especially in such a stagnant economy. There is also a further threat on the horizon as many economists warn that the Chancellor has too little financial headroom in such uncertain times for world trade.

The Chancellor may not be able to avoid having to shore up the public finances once more in the next Autumn Budget later this year and be forced to u-turn by opting for increases in income tax, national insurance and even VAT.  This could have a catastrophic effect on the consumer-facing parts of the service sector as disposable incomes are cut.

With so much uncertainty, it is impossible to predict how the rest of 2025 will turn out for services businesses, never mind as far out as 2026. The March GDP figures are no reliable guide. Nevertheless, it looks likely that it will be an increasingly challenging environment for them, especially the smaller, less well capitalised and therefore more vulnerable companies.

If you are seeking professional advice for your business, Opus is here to help. You can speak to one of the members from Opus, who can discuss options with you. We have offices nationwide and by contacting us on 0203 995 6380, you will be able to get immediate assistance from our Partner-led team.