The UK's dominant services sector, which contributes nearly 80% to the country's economic output, is experiencing a significant shift as companies increasingly opt for automation over hiring new staff. This trend has led to a deepening of job cuts, with employment numbers falling more sharply in January compared to December, continuing a pattern that began in October 2024.
Longest Job-Shedding Period in 16 Years
According to the latest Purchasing Managers' Index (PMI) survey, compiled by S&P Global, the services sector is now enduring its longest period of job shedding in 16 years. Firms are not only reducing staff but also choosing not to replace voluntary leavers, exacerbating the employment decline. The PMI survey is widely regarded as one of the most reliable indicators of sector performance, providing a clear snapshot of current economic conditions.
Automation Drives Staffing Decisions
Anecdotal evidence from the survey suggests that many companies are turning to automation to address staffing shortfalls and boost productivity. This move is partly driven by squeezed profit margins and fragile market conditions, which are making traditional hiring less attractive. Tim Moore, Economics Indices Director at S&P Global Market Intelligence, noted, "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."
Business Activity Grows Despite Job Cuts
Interestingly, this job-shedding trend is occurring alongside a rebound in business activity. The PMI survey showed that output in the services sector rose to a balance of 54 in January, up from 51.4 in December, marking the fastest pace of expansion since August. Any reading above 50 indicates growth, highlighting a paradoxical situation where the sector is expanding while cutting jobs.
Impact of External Factors
The shift towards automation coincides with several external pressures affecting the services industry. These include:
- Rises in the national living wage and increases in employers' national insurance contributions since last April, which have particularly impacted entry-level positions in sectors like publishing and legal services.
- Widespread rising costs, such as higher energy and food prices, alongside a shake-up of business rates that is pushing up bills for many companies.
- Geopolitical risks and weak consumer demand, which have created an uncertain economic environment.
Broader Economic Context
The services sector encompasses a wide range of industries, from hospitality and catering to legal and financial firms. Its performance is crucial to the UK's overall economic health. The recent PMI data, when combined with January's manufacturing survey, indicates that total business activity in the UK reached a 17-month high in January, suggesting a mixed economic picture with growth in output but contraction in employment.
Sentiment Boost from Budget Announcements
Part of the improvement in business activity can be attributed to a lift in sentiment following the late November budget. This ended months of speculation about potential tax rises, allowing delayed projects and investments to proceed. However, expectations for an upturn in business activity remain the strongest since October 2024, when Chancellor Rachel Reeves imposed significant tax rises on companies in her first budget, despite concerns from businesses about economic challenges.
Future Outlook and Implications
As companies continue to automate, the services sector may see further job reductions, potentially reshaping the labour market. This trend raises questions about the long-term impact on employment and economic stability, even as business activity shows signs of growth. The ongoing shift highlights the need for adaptive strategies in workforce management and economic policy to balance productivity gains with job preservation.
