The UK service sector recorded its steepest decline in employment since January 2021, according to the latest S&P Global UK Services PMI report for December 2024.
Rising payroll costs, weak demand and subdued economic confidence contributed to the contraction, marking the third consecutive month of workforce reductions.
Nearly twice as many businesses (23%) reported falling staff levels compared to those that increased their workforce (12%). Survey respondents attributed the decline to hiring freezes and the non-replacement of leavers, with many service providers citing the rising costs of maintaining payrolls as a key factor.
The drop in employment accompanies a marginal increase in overall business activity. The seasonally adjusted Business Activity Index rose slightly to 51.1 in December, up from 50.8 in November, remaining just above the neutral 50.0 mark for the fourteenth consecutive month. However, business activity growth remained modest, with subdued sales pipelines and weak domestic and international demand weighing heavily on the sector.
Tim Moore, Economics Director at S&P Global Market Intelligence, said, “Excluding the pandemic, this represented the steepest pace of job shedding for more than 15 years.”
Weak Demand and Economic Concerns
The report pointed to near-stagnant new orders in the service economy, reflecting a lacklustre end to 2024. December’s data showed the lowest growth in new work since October 2023, with businesses attributing the slowdown to falling confidence among clients. The Autumn Budget and planned increases in employers’ National Insurance contributions were commonly cited as factors impacting spending.
Export demand also faltered, with new export sales decreasing for the first time since September 2023. Service providers noted lower orders from EU clients, though some reported resilient demand in the US market.
Rising costs continue to present challenges for businesses. December saw input cost inflation accelerate to its highest rate since April 2024, driven by salary increases and higher raw material expenses. Businesses responded by passing these costs onto customers, resulting in robust price inflation that remains well above pre-pandemic levels.
Moore said, “The service sector ended last year with only a marginal upturn in business activity and a near-stalling of incoming new work. Survey respondents suggested that falling business and consumer confidence, largely due to worries about domestic economic prospects in 2025, had led to a considerable loss of growth momentum.”
Business Sentiment Remains Low
Optimism among service providers remained muted. The degree of positive sentiment about business prospects in 2025 was unchanged from November’s 23-month low. Concerns centred on rising payroll costs, constrained client budgets, and a general unease about the broader economic climate.
Moore added, “Concerns about the impact of rising payroll costs, alongside a general unease about the climate for business investment, were reported as the main factors weighing on prospects for growth in 2025.”
The report highlighted broader trends in the UK private sector, with the Composite Output Index posting a reading of 50.4 in December, down slightly from 50.5 in November. This marks the fourth consecutive month of weakening private sector output growth. Employment in the private sector employment the sharpest fall since January 2021, mirroring trends in the service sector.
