UK Services Sector Sees Strongest Expansion in Nearly a Year Amid Cooling Price Pressures

3 July 2025

In an encouraging sign for the British economy, activity in the services sector reached its highest level since August 2024, according to S&P Global’s Purchasing Managers Index released on July 3. The headline PMI climbed to 52.8 in June, up from 50.9 in May and exceeding the preliminary reading of 51.3. Readings above 50 signal expansion in the dominant sector of the UK’s economy.

The solid rise in activity reflects robust domestic demand, with firms reporting their strongest intake of new business since November. This broadening growth paints a picture of a service economy that is recovering its stride following a sluggish winter, bolstered by renewed consumer confidence and an uptick in business services .

Notably, the rate of price increases in the sector slowed to its lowest level since February 2021. This easing of inflationary pressure comes as welcome news to the Bank of England, which has been closely monitoring services price dynamics a key indicator in its inflation outlook. Tim Moore, economics director at S&P Global Market Intelligence, noted that this combination of cooling price pressures and decreased employment cost growth opens space for the Bank to resume cutting interest rates at its August policy meeting.

Despite the upbeat numbers, there are signs of caution. Business expectations for the year ahead weakened slightly, with firms citing ongoing uncertainty seeded by both domestic political shifts and external trade pressures, including concern about U.S. tariffs. Labor costs remain a challenge, with firms reporting inflation in labor input driven by higher national insurance contributions and a nearly 7 percent rise in the minimum wage.

Moreover, continuous employment contraction continues, with companies cutting employee numbers for the ninth consecutive month largely through attrition rather than layoffs reflecting a cautious approach to hiring amid lingering economic uncertainty .

Export demand also remained a drag, with new export orders falling for the third straight month, pulled down by weaker demand from both European and U.S. buyers. The composite PMI reflecting activity across both services and manufacturing edged up to 52.0 from May’s 50.3, a sign of sustained growth but tempered by the challenges in trade-influenced sectors.

Taken together, these trends sketch a service economy that is steadily improving while wrestling with global headwinds and structural cost pressures. The cooling in prices is a particularly welcome development, offering relief to consumers and adding flexibility to the Bank of England’s monetary policy stance.

Analysts say the momentum is building toward a second rate cut in August, following the initial rate reduction in May. Some predict that a third cut could follow later in 2025 if inflation continues to ease and labour cost inflation cools further .

Yet the sectors’ mixed signals cannot be ignored. Rising labour costs and subdued business confidence highlight the fragility underpinning the headline figures. While businesses are seeing more new domestic demand, their willingness to rehire and invest remains limited. Export weakness further pressures profitability, particularly among companies linked to global supply chains.

The broader context reveals a patchwork recovery. Manufacturing activity showed signs of pick-up as well, helping boost the composite PMI. Yet services account for roughly 80 percent of UK economic activity, meaning the strength or fragility of this single sector can shape broader economic outcomes.

For policymakers, the key question now is balancing growth and inflation. The Ba nk must delicately weigh the benefits of supporting economic momentum via rate cuts against the risk of reigniting inflation. The low rate of services price increases and waning employment cost inflation offer policymakers some pressing incentives to lean toward easing but they must remain mindful of broader cost trends and global uncertainty .

Looking ahead, businesses will be closely watching further indicators. Coming inflation data, wage growth figures, and updates on cross-border trade conflicts especially looming tariffs will play pivotal roles in shaping the trajectory of both firm-level sentiment and policy responses. Firms are likely to continue prioritizing cost control, including a careful approach to hiring and investment, at least until clarity emerges on global trade and domestic demand.

In sum, the June PMI paints a cautiously optimistic portrait: the services sector is gaining traction, inflation pressures are easing, and broader economic indicators point to a stabilizing financial landscape. However, persistent risks from wage inflation and hiring hesitation to export slumps and geopolitics mean that the overturning of stagnation is fragile and still under negotiation.

While this expansion supports arguments for further interest rate relief, Governor Andrew Bailey and his team must consider the durability of growth and the potential for renewed inflation before committing to deeper cuts in the coming months. Whether the Bank of England acts in August could determine whether positive momentum consolidates or fizzles out.