In a surprise twist for policymakers, Britain’s dominant services sector appears to be gaining momentum — even as concerns about inflation, business investment and public finances linger. New survey data shows the UK services business-activity index climbed to 52.3 in October 2025, up from 50.8 in September and ahead of the earlier estimate of 51.1.
A Sector Under Pressure — Yet Holding Firm
The services industry accounts for roughly 80% of UK GDP, making its health critical to the broader economy. The latest S&P Global UK Services PMI (Purchasing Managers’ Index) suggests that firms are still expanding output, even as many struggle with rising costs, weak demand and staffing shortages.
Tim Moore, economics director at S&P Global Market Intelligence, noted that a number of firms reported resilient domestic demand and launch of new products as underlying drivers.
However, the context is anything but comfortable. Inflation-adjusted wage growth remains weak, business investment continues to lag, and borrowing costs stay elevated. The fact that services remain in expansion mode may give a degree of relief to the Bank of England (BoE) but does little to ease the structural challenges facing the UK economy.
What’s Driving the Uptick?
Several themes stand out from the survey commentary:
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Success of new product launches and innovation: Some firms reported that recent items or services introduced in the past six months had begun to pay off, boosting order books.
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Lower input-cost pressure: Input cost inflation fell to its weakest level since November 2024 — easing margin pressure for some companies.
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Technology investment: Some firms cited technological upgrade plans and investment in digital workflows as key enablers of recent activity.
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Domestic vs international demand: Unlike the export-oriented manufacturing sector, many service firms are more insulated from global trade headwinds and thus benefit from UK domestic spending.
The Flip Side: Signs of Fragility
Despite the positive headline, deeper figures raise caution:
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Hiring remains weak — firms continue to report reductions or hiring freezes. The pace of staff cuts is the slowest since October 2024, yet the headline index still signals caution rather than confidence.
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Forecasts for future growth, while improved, remain tentative. Some companies flagged lingering uncertainty about consumer demand and the timing of large-scale investment decisions.
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Inflation is still above target and challenge remains for the London-led economies versus regional areas where growth is slower.
Why It Matters for the Economy
The services sector’s resiliency matters for several reasons:
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Employment — With the UK labour market already stretched, continued activity in services helps avoid large-scale job losses which could trigger a sharp consumption downturn.
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Consumption link — Service firms depend on consumer and business spending; positive developments could signal that households are adapting to higher price levels.
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Monetary policy — The BoE and markets closely monitor services activity as a key input for rate decisions. With the PMI above 50 (expansion threshold), it reduces the argument for immediate rate cuts, yet reminds policymakers of the fragile position.
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Regional spill-over — While London dominates, stronger service sector performance could encourage spill-overs to other UK regions if digital and remote working models expand.
The Broader Picture: Productivity and Growth
Even with services expanding, the UK still faces long-running challenges. As noted in a recent article, the UK’s productivity — output per hour worked — is around 20% lower than peers like France, Germany and the U.S. Growth remains sluggish and the economy continues to chug along rather than surge.
Major structural issues such as skills shortages, uneven regional investment, ageing infrastructure and Brexit-related friction still weigh heavily. As one economist put it: “We’re getting the gears turning but haven’t moved into high-gear yet.”
Businesses Responding to the Moment
Service firms are increasingly focusing on:
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Digital transformation: Upgrading IT systems, automation of routine work, investment in customer-facing apps and data analytics.
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Product differentiation: Launching new services, packages or subscription models to retain competitive edge.
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Regional expansion: Some large firms are opening satellite hubs outside London, seeking lower wage base and access to different talent pools.
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Cost control: With input inflation still present, companies are reviewing supply chains, energy usage and vendor contracts more aggressively.
What’s Next?
Looking ahead, several developments deserve attention:
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Autumn budget & fiscal policy: With the economy showing signs of resilience but still weak growth, Chancellor Rachel Reeves faces pressure to support investment without inflaming inflation or borrowing.
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Interest rate direction: With data holding up in services, the BoE is likely to proceed cautiously. Some markets expect rate cuts in 2026, but policymakers remain wary of a rebound in inflation.
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Skill bottlenecks: As firms expand services and digital capabilities, the risk of talent shortages and wage pressure will rise — especially in high-growth niches like fintech, health-tech and professional services.
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Regional divergence: If services remain concentrated in London and the South East, the north/south divide may deepen — prompting further government interventions such as “levelling-up” schemes.
UK services have shown unexpected strength in October 2025 — a helpful sign amid a backdrop of economic uncertainty. But this uptick must be seen as cautious rather than confident. The broader growth model remains fragile, with structural impediments still significant. For British business and policymakers alike, the message is clear: momentum is good, but it must be built on firm foundations.
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