Insights 
VT 
UK’s service sector PMI for May was updated to 50.9 from a preliminary 50.2, showing a slight increase from April’s 49.0. The Composite PMI also rose to 50.3 from an initial estimate of 49.4, an improvement from the previous 48.5.
Business activity saw a modest rise, with optimism reaching its highest in seven months. Despite this, new work and employment numbers continue to decline, reflecting ongoing challenges within the sector.
Decline in New Orders
Total new orders decreased due to cuts in business and consumer spending. The service sector experienced an eight-month consecutive drop in employment, the longest period of decline since 2008-10, excluding the pandemic.
Input costs rose, primarily due to increased wages, but the rate of cost inflation slowed from April’s high. Competitive pressures led to the slowest increase in prices charged by service providers since October 2024.
This update indicates that while overall activity in the country’s service sector showed a mild rebound, the underlying weakness in demand continues to put pressure on businesses. A reading above 50 in the Purchasing Managers’ Index (PMI) signals expansion, rather than contraction, but barely crossing that threshold speaks more to stabilisation than any strong momentum.
What we’re seeing here is a gap between business expectations and the demand reality. Confidence among service providers has picked up – the highest in more than half a year – likely spurred by hopes of lower interest rates or easing inflationary forces down the line. However, this renewed optimism stands in contrast to ongoing job cuts and a further decline in new orders. It tells us that companies are still cautious, especially when looking at hiring and capital spending.
Continued Reduction in Employment
The continued reduction in employment, now running for eight straight months, signals that margins remain pressured and businesses are hesitant to expand their wage bills. For context, such a sustained job trimming hasn’t been seen in over a decade, if we exclude the unusual conditions in 2020 and 2021. That fact alone gives us an idea of how stressed certain parts of this sector remain.
Price data shows a slight easing on both sides. Input costs rose, mainly on account of higher wage demands, but encouragingly, the pace of cost growth has slowed when compared to April. Likewise, companies have pulled back on price increases, leading to the weakest rise in charges for services in over six months. Some are clearly choosing to absorb higher costs instead of passing them on, aiming to maintain market position in a weakening demand environment.
What this means for us in the days ahead is fairly clear: don’t get distracted by headline PMI moves edging slightly higher. It’s the forward-looking items such as hiring intentions, pricing behaviour, and the split between expectations and current activity that will shape the next few weeks. The PMI bounce may provide a temporary reflation in sentiment, but it is unlikely to last without confirmation from broader consumption or business investment data.
With policy possibly nearing a turning point, the reaction function to low-tier economic beats or misses becomes more sensitive. Volatility can flare on relatively minor data swings. It’s worth remaining nimble until these green shoots actually push through the soil, and not just appear that way on paper.
