Companies in the UK’s services sector reduced headcount in January, with many turning to automation instead of hiring new staff, according to the latest purchasing managers’ index (PMI).
The survey showed employment fell at a faster pace than in December, extending a run of job losses that began in October 2024. S&P Global, which compiles the closely watched index, described the current period as the longest stretch of job shedding in the services sector for 16 years. Many firms are also choosing not to replace staff who leave voluntarily.
Automation and cost pressures weigh on hiring
Survey respondents cited a mix of factors behind weaker hiring. Anecdotal evidence suggested some businesses are investing in automation to offset staffing gaps and improve productivity. At the same time, squeezed profit margins and fragile market conditions have encouraged caution.
The services sector accounts for nearly 80% of UK economic output and spans industries from hospitality and catering to legal and financial services. Recent developments in artificial intelligence have added to uncertainty, particularly in publishing and legal software.
Recently, Anthropic, the company behind the Claude chatbot, said its technology could automate certain legal tasks. The announcement triggered sharp falls in the share prices of publishers and data firms, with the sell-off beginning in London and spreading to global markets. This came even as the FTSE 100 reached a record high.
Entry-level roles in some of these industries have also been affected by higher labour costs, including increases in the national living wage and employers’ national insurance contributions introduced last April. These pressures sit alongside rising energy and food prices and changes to business rates, which have drawn criticism from some companies.
Activity rebounds despite job losses
Despite the weaker employment picture, overall business activity in the services sector strengthened at the start of 2026. The PMI output index rose to 54 in January from 51.4 in December, marking a five-month high and the fastest pace of growth since August. A reading above 50 signals expansion, while below 50 indicates contraction.
When combined with the manufacturing PMI, the composite index showed UK business activity at a 17-month high.
The survey suggested that part of the improvement reflects a rebound in sentiment following the late-November Budget, which ended months of uncertainty about possible tax changes. Some delayed investments and projects have since resumed.
Expectations for future activity also improved, reaching their strongest level since October 2024. That month saw significant tax increases announced in the Chancellor’s first Budget, despite concerns about geopolitical risks and subdued consumer demand.
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