UK Service Sector Endures Longest Job Loss Streak in 16 Years
New research reveals that the UK service sector is currently experiencing its most prolonged period of employment decline in over a decade and a half, despite showing signs of increased business activity at the beginning of 2026. According to the latest S&P Global Purchasing Managers' Index (PMI), employment within the sector has decreased every month since October 2024, with the rate of job losses accelerating notably in January compared to the previous month.
Factors Driving Employment Decline
The survey highlights several critical factors contributing to this sustained downturn in service sector jobs. Squeezed profit margins, fragile business confidence, and the ongoing adoption of automation technologies are identified as primary drivers. Notably, the research suggests that the UK is losing more positions to artificial intelligence than many of its international rival economies.
Rob Wood, Chief UK Economist at Pantheon Macroeconomics, also pointed to the impact of fiscal policy, stating, "Employment remains in the doldrums as firms continue to cut costs to absorb last year's payroll tax hike." This refers to the national insurance increase that came into effect in April of the previous year.
Broader Labour Market Pressures
Tim Moore, Economics Director at S&P Global Market Intelligence, described the survey as sending "gloomy signals" for the UK labour market, which is already under significant strain. Official data shows unemployment rose to 5.1 per cent in the final quarter of last year, marking the highest level in four years. Many economic forecasters are predicting further job losses in the coming months, adding to the sector's challenges.
Contrasting Business Activity Growth
Despite the concerning employment trends, the service sector displayed several positive indicators in January. Overall business activity climbed to its highest point since August 2025, with the PMI reaching 54.0, up from 51.4 in December. This figure comfortably exceeds the 50.0 threshold that separates expansion from contraction, meaning the sector has now grown for nine consecutive months.
Martin Beck, Chief Economist at WPI Strategy, commented on this apparent contradiction, noting, "Part of the improvement appears to reflect a post-Budget lift in sentiment, with greater policy clarity following November's fiscal event encouraging the release of some delayed projects and supporting investment spending." He added that while January's PMI might overstate the underlying strength, it aligns with an optimistic view of the economy's prospects for the year.
Key Drivers of Activity Increase
Several factors contributed to the rise in business activity:
- Enhanced confidence among clients and improved investor sentiment, partly linked to post-Budget certainty.
- A general upturn in clients' willingness to spend at the start of the year, despite overall weak consumer spending.
- Improved order books attributed to increased digital marketing budgets and investments in new technologies.
- A recovering global trade environment, which boosted exporters following disruptions caused by tariff announcements the previous year.
Service providers reported greater sales to European clients, particularly in Ireland, though they also noted ongoing challenges from general economic uncertainty and intense international competition.
Future Outlook and Business Confidence
Looking ahead, business confidence among service sector firms has risen to its highest level since the government's first budget in 2024. This optimism is fueled by healthier sales pipelines and stronger investment spending from clients. Tim Moore summarised the situation, stating, "The latest survey revealed an encouraging start to 2026 for the UK service sector, following a sluggish end to last year."
This complex picture presents a UK service sector grappling with structural shifts towards automation and cost pressures, even as it experiences a rebound in business activity and forward-looking confidence, creating a challenging environment for employment stability.
