UK service sector output fell sharply in January

According to the report from IHS Markit/CIPS, January data pointed to a steep and accelerated fall in UK service sector output, with the rate of decline the fastest recorded since May 2020. Survey respondents overwhelmingly linked lower activity to the impact of restrictions on trade and temporary business closures during the third national lockdown. Despite a sharp downturn in client demand due to the coronavirus disease 2019 (COVID-19) pandemic, the latest survey indicated that business optimism improved for the third consecutive month. The degree of positive sentiment was the strongest since May 2014. This largely reflected the successful UK vaccine rollout so far in 2021 and hopes of a strong rebound in economic conditions as the pandemic situation improves.

At 39.5 in January, the headline seasonally adjusted UK Services PMI Business Activity Index dropped sharply from 49.4 in December and signalled the fastest reduction in business activity for eight months. Around 41% of survey respondents indicated a decline in output during January, while only 15% registered an expansion.

Lower levels of service sector activity were attributed to the third national lockdown in January and a subsequent slump in output among travel, leisure and hospitality businesses. Survey respondents also cited cautious spending patterns among clients and renewed delays to projects due to the pandemic. Where growth was reported, this was often linked to resilient demand for residential property ahead of the stamp duty deadline, alongside rising demand in areas such as digital services and e-commerce.

Looking ahead, around 60% of the survey panel anticipate a rise in business activity over the next 12 months, compared to just 13% that predict a decline. Improved confidence towards the business outlook was strongly linked to the expected trajectory of the pandemic in 2021, with swift progress for the UK vaccine rollout providing hope of a timely return to growth and the release of pent up demand in 2021.