Most services firms facing slump even before new UK lockdown

Tom Belger
·Finance and policy reporter
·3-min read
Closed shops and cafes in Covent Garden as new tier 4 coronavirus restrictions are in place to limit the spread of the new strain of coronavirus as the infections rate continues to rise, in Central London, UK on Dec 22, 2020.The capital, South- East of England and the East of England entered Tier 4 on Sunday with a stay at home order, all non essential shops closing, banning households mixing. (Photo by Claire Doherty/Sipa USA)
Closed shops in Covent Garden, London, as new figures lay bare the struggles of UK services firms with lockdown now in force. Photo: Claire Doherty/Sipa USA.

Most services firms were facing a slump in trade even before full-scale lockdowns came into force across the UK, according to a survey.

A bellwether poll of firms in Britain’s services sector, which makes up around four-fifths of the economy from cafes to IT consultancies, showed a narrow majority reporting lower trade in December.

Companies’ fortunes continued to deteriorate amid a tightening of restrictions in parts of the country last month, and they now face a fresh battle to survive the latest nationwide lockdown.

A string of business leaders have warned the new restrictions will be a “body blow” to firms, with Greggs (GRG.L), Topps Tiles (TPT.L), and Auto Trader (AUTO.L) the latest to sound the alarm on Wednesday.

READ MORE: Greggs and Topps Tiles warn new lockdowns will hit sales

Industry chiefs said firms face “hardship,” increased debt and mounting lay-offs, while many economists now predict a double-dip recession for the UK.

Tim Moore, economics director at IHS Markit, which compiles the new figures, said: “December data confirm that the UK service sector has swung back into decline after the partial rebound seen during the third quarter of 2020, largely reflecting tighter restrictions on consumer services amid the worsening trajectory of the pandemic.”

WATCH: UK ‘on course for double-dip recession’

Moore said firms were forced to slash prices to lure customers just as they faced higher operating costs, driven up by higher freight costs amid ports and border chaos.

"With a third national lockdown underway, service providers will be braced for a sustained period of subdued UK economic conditions and deferred client spending in the first quarter of this year," he added.

Yet business optimism came close to a six-year high, with vaccines expected to fuel a "strong economic rebound" later in the year.

The latest data is from a closely watched purchasing managers’ index (PMI), which turns survey responses into headline figures on trade levels.

The reading for services came in at 49.4, on an index where figures above 50 show most firms expanding and below 50 show decline. The falls in trade were worse than both previous estimates and analysts’ expectations, but less widespread than November when tighter COVID-19 restrictions were in force.

The same data was published for eurozone economies earlier on Wednesday, showing a similar deterioration with a reading of 49.1.

The headline PMI reading for servicesis back in negative territory below 50, showing most firms experiencing lower trade. Chart: IHS Markit and the Chartered Institute of Procurement & Supply (CIPS).
The headline PMI reading for services is back in negative territory below 50, showing most firms experiencing lower trade. Chart: IHS Markit and the Chartered Institute of Procurement & Supply (CIPS).

Similar figures for the UK manufacturing sector on Monday painted a less bleak picture, with the strongest performance in three years last month.

Much of the boost was driven by UK and European firms rushing to stockpile goods ahead of a widely feared no-deal Brexit, however. Chaos at Britain’s ports also saw factory backlogs of work rise to levels not seen in a decade, with the sector now “holding its breath” over the impact of the UK-EU trade deal.

Meanwhile separate industry data for Britain’s carmakers on Wednesday showed sales down 10.9% in December, with lockdown curbs, Brexit uncertainty, and a 2030 ban on petrol and diesel cars blamed for falling trade.

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READ MORE: Firms tell government pandemic downturn won’t end even with vaccine