UK economy gathers pace at start of 2026 but cost burdens persist, PMI shows

Activity in Britain’s services sector grew strongly in January and confidence rose, a survey showed on Wednesday, but firms also reported a jump in their prices, a potential concern for the Bank of England before its interest rate decision this week.

The S&P Global UK Services Purchasing Managers’ Index rose to 54.0 in January, the highest since August 2025, up from December’s 51.4. Wednesday’s reading was slightly lower than a preliminary flash reading of 54.3 which would have been the highest since April 2024.

PMI readings above 50.0 indicate growth in activity, while those below that level point to a contraction.

Expectations for future output were the strongest since October 2024 – when finance minister Rachel Reeves imposed unexpectedly big tax rises on companies – despite firms’ concerns about geopolitical risks and weak consumer demand.

Business confidence had declined again in the run-up to Reeves’ second budget in November 2025. This included 26 billion pounds ($36 billion) of tax increases but most of them were deferred and less heavily focused on businesses than in 2024.

Tim Moore, economics director at S&P Global Market Intelligence, said some firms reported that clarity after the budget had contributed to an improvement in confidence.

The composite PMI, which combines the services survey with a strong reading of the manufacturing sector published on Monday, increased to its highest since August 2024 at 53.7 in January from 51.4 in December but was below the 53.9 first reported.

Overall services export orders increased at the second-fastest pace since October 2024.

“The latest survey revealed an encouraging start to 2026 for the UK service sector, following a sluggish end to last year,” Moore said.

“However, there were again gloomy signals for the UK labour market outlook as staff hiring decreased at a steeper pace in January as firms looked to offset rising payroll costs,” he added.

Hiring fell for the 16th month in a row, the longest unbroken decline since 2010. Some firms, especially in the hospitality sector, said rising staff wages and concerns about the broader economic outlook had led to them not replacing staff who left.

Britain’s main minimum wage rate will rise by 4.1 per cent to 12.71 pounds an hour in April after a 6.7 per cent uplift last year.

While input costs for services firms last month increased more slowly than in December, prices charged by companies sped up sharply to rise at their fastest pace since August.

The BoE, which is expected to keep interest rates at 3.75 per cent on Thursday, is monitoring services price inflation as it considers the pace at which it can cut borrowing costs.

Investors are pricing in one or two quarter-point cuts in 2026.