Employment in the UK's services sector fell for the 23rd consecutive month in August, as businesses maintained hiring freezes and trimmed headcounts in response to persistent cost pressures.

S&P's latest Purchasing Managers Index (PMI) for the services industry – a figure closely monitored by economists, including at the Bank of England when setting interest rates – showed the sector has now recorded its longest continuous stretch of workforce reductions since records began in 1996. Services dominate the UK economy, accounting for roughly four-fifths of output, making hiring behaviour in the sector a key signal for the wider labour market.

Rising cost pressures and elevated input prices were cited as shaping business behaviour, with surging fuel, transportation and wage bills pushing up operational costs. Some firms were recorded as turning to automation as a way to boost productivity – a shift economists have highlighted as a typical response when labour costs rise.

According to a business cost calculator launched by the British Chambers of Commerce, a typical mid-sized firm in the UK is forecast to be paying roughly £827,000 more a year than it was in 2016 as a direct consequence of domestic policy decisions from the government.

Despite the prolonged slump, the pace of job cuts slowed to its lowest rate since October 2025, following a modest recovery in new business and confidence on the domestic front.

The PMI posted a headline reading of 52.5 in August, edging up from 52.1 in July and remaining above the neutral 50.0 mark that signals whether a sector is growing. The divergence between expanding activity and continued job cuts suggests firms are meeting demand without adding staff, a pattern that may weigh on household incomes if sustained.

"Service providers are increasingly optimistic about the year ahead business outlook, with confidence levels now close to those seen just prior to the Middle East conflict," said Tim Moore, economics director at S&P Global Market Intelligence.

Burnham and Healey look to build confidence

Prime Minister Andy Burnham and Chancellor John Healey face a test in maintaining the momentum as the new government's first Budget looms on 28 October. The Budget will be accompanied by fresh forecasts from the Office for Budget Responsibility, which will determine how much room the Chancellor has to spend against his fiscal rules.

Moore said business activity growth projections were "still subdued in comparison to long-run trends amid lingering worries about inflationary pressures and geopolitical tensions".

The US-Iran war has piled further pressure on the new Chancellor, who is expected to see his fiscal headroom slashed as a result of surging borrowing costs. Bond yields across the globe have climbed amid surging oil prices, triggering widespread fears of a spike in inflation.

Pantheon Macroeconomics researchers suggested that higher gilt yields had cut the fiscal headroom to just £13bn – below previous forecasts of around £15bn – after a recent sell-off in bonds caused borrowing costs to rise.

The hit to bond markets would force the Office for Budget Responsibility (OBR) to revise up its projections on debt interest payments in 2030. The UK government is currently set to spend about £135bn on paying off debt in five years.

Healey's commitment to early spending ambitions and his predecessor's fiscal rules – funding day-to-day spending through tax receipts – have heightened speculation of another hefty tax raid. Any tax rises announced in the Budget would add to the cost pressures already weighing on services firms, the same pressures the PMI shows driving the sector's long run of job cuts.

Economists have warned that "large tax hikes are on the way" as Healey looks to meet calls for further cost of living support, increase defence spending and maintain fiscal headroom.