Services activity contracts – EY ITEM Club comments

• October's UK S&P Global/CIPS services PMI fell to a 21-month low, continuing the summer's downward trend in the sector. The services index joined its manufacturing peer in contractionary sub-50 territory, adding to the signs that the economy is heading into a recession.

• However, the survey pointed to an easing in cost and price pressures. As private sector activity and inflation softens, this is likely to restrain the Monetary Policy Committee from delivering the large rate increases that markets are expecting in 2023.

Martin Beck, chief economic advisor to the EY ITEM Club, says: “October's services PMI fell to 48.8, from 50.0 in September – the first time the index has fallen into contractionary territory since the start of 2021. Combining the services reading with October's manufacturing survey, the composite PMI fell to 48.2 from 49.1. This is in line with the EY ITEM Club’s view that GDP will be weak in Q4 – notwithstanding the support that will come from Q4 having a full quota of working days – after both Q2 and Q3 had one extra bank holiday.

“Respondents reported that falling demand was due to a combination of the squeeze on household incomes and heightened political uncertainty weighing on business investment. 

“The survey also pointed to a further easing in cost and price inflation. Despite the upward pressure from the month's depreciation in sterling, rising energy bills and staff costs, businesses reported weaker cost increases. The rate of output price inflation was the lowest for nine months. A contraction in activity and slowing service sector inflation may affect the MPC's appetite for raising interest rates to as high as markets are expecting in 2023 – the EY ITEM Club forecasts a peak in Bank Rate of 4%.”