UK services sector looking strong

The services sector remained the driving force of the UK economy in 2023, accounting for around 80% of Gross Domestic Product (GDP). Despite facing high inflation, rising interest rates and weaker consumer spending, the sector continued to demonstrate resilience and remained the largest contributor to economic activity. While overall economic growth was subdued, services generally outperformed manufacturing and supported the UK's recovery from recent economic challenges.

Facts and Figures

The S&P Global/CIPS UK Services Purchasing Managers' Index (PMI) measures business conditions across a broad range of service industries, including financial services, transport and communication, professional and business services, computing and IT, hospitality, and personal services. The index provides an important indicator of the sector's health.

A PMI reading above 50 indicates expansion, while a reading below 50 signals contraction. Throughout much of 2023, the Services PMI remained close to or above the 50-point mark, reflecting modest but positive business activity despite difficult economic conditions. Business confidence improved towards the end of the year as inflation eased and demand stabilised.

Part of a Wider Economic Picture

The services sector continued to outperform manufacturing, which experienced weaker demand and higher operating costs throughout the year. Construction also faced challenges from rising borrowing costs and reduced investment. Although economic growth remained sluggish, services provided valuable support to the UK economy, helping to prevent a deeper downturn.

Businesses continued to face pressure from higher wages, energy costs and borrowing costs as inflation remained well above the Bank of England's 2% target. However, falling energy prices and improvements in supply chains gradually reduced cost pressures during the second half of 2023. Overseas demand and business-to-business services also helped offset weaker household spending.

Implications

The performance of the services sector remained an important indicator for investors and policymakers. Financial markets closely monitored PMI data because it provided an early signal of economic performance before official GDP figures were released.

Unlike the period following the financial crisis, the Bank of England had significantly increased interest rates during 2023 to tackle persistent inflation, with Bank Rate reaching 5.25% by the end of the year. Policymakers therefore focused on balancing inflation control with supporting economic growth, while businesses and households adjusted to higher borrowing costs.