Services sector rebound signals renewed optimism

After months of cautious optimism, the UK economy may finally be turning a corner, and it’s the services sector leading the way.

"This feels like the most solid month we’ve had in over a year," said the managing director of a London-based consulting firm. Illustrating photo

"We’re not booming, but we’re booking work again, and clients are starting to plan ahead not just survive month to month."

New data released this week show a surprising uptick in activity among UK service providers, marking one of the strongest monthly expansions since early 2023 and reigniting hope for sustained growth across the broader economy.

The UK’s Services Purchasing Managers’ Index (PMI) climbed to 54.8 in March, up from 53.1 in February and comfortably above the neutral 50 mark that signals expansion. The sector ranging from hospitality and retail to finance, legal, and professional services accounts for over 70% of the country’s GDP. Its performance is often seen as a bellwether for economic momentum.

What makes this data so significant is the backdrop against which it arrives. After a sluggish 2024 marred by persistent inflation, tight credit conditions, and muted consumer sentiment, many economists had warned of stagnation or even a shallow recession in early 2025. Instead, the latest services PMI suggests that demand especially domestic is stabilizing, and businesses are beginning to invest again in hiring and expansion. Surveyed firms reported a rise in new orders and stronger demand in both B2B and consumer-facing services, such as hospitality and entertainment. Employment in the sector also grew modestly, with firms more confident about future workloads.

"This feels like the most solid month we’ve had in over a year," said the managing director of a London-based consulting firm. "We’re not booming, but we’re booking work again, and clients are starting to plan ahead not just survive month to month."

While inflation has come down from its peak, the real story behind the services sector’s resilience may be the relative strength of household spending. Real wages have begun to rise as pay growth outpaces price increases for the first time in over two years. Combined with stable energy bills and lower mortgage refinancing pressure, this has created a more stable consumer base.

Foot traffic in high streets and travel bookings have both shown noticeable improvement. Early data from retail associations and major hospitality chains suggests spending levels over the Easter break will likely outpace forecasts, a promising sign for Q2.

Perhaps most encouraging is the rebound in business sentiment. According to the latest Business Confidence Index, expectations for growth, hiring, and capital investment have all risen for three consecutive months. This trend is most pronounced among small and medium-sized enterprises, who are reporting stronger access to financing and easing cost pressures. Importantly, confidence is also being bolstered by signs that the Bank of England could begin easing interest rates in the second half of the year. While the Bank held its rate at 4.5% in March, markets now widely expect at least one cut by September. This potential shift in monetary policy is providing businesses with much-needed breathing room in planning their next moves.

Risks Still Loom

Despite the positive signals, challenges remain. Manufacturing output remains sluggish, export demand is soft, and geopolitical uncertainty continues to cast a shadow over global trade flows. Core inflation particularly in services, remains stubborn, complicating the Bank of England’s path to rate cuts. Moreover, while large professional firms are benefiting from improved demand, some small businesses continue to face tight margins and cautious consumers.

Still, the message from March’s data is clear: the UK economy is not contracting. In fact, it may be building modest momentum in its most vital sector. If the rebound in services proves durable, it could anchor broader recovery in investment, hiring, and household confidence foundations that have looked shaky for much of the past two years. For policymakers and businesses alike, the takeaway is simple, after a long winter, spring may finally be in sight.