According to the report from IHS Markit/CIPS, UK service providers recorded a sustained drop in overall activity during December, with the downturn overwhelmingly linked to business disruptions, restrictions on trade and temporary closures due to the coronavirus disease 2019 (COVID-19) pandemic. At the same time, margins were under pressure from sharply rising input costs and ongoing price discounting across the service economy. On a more positive note, business expectations for the next 12 months strengthened in December and were the most optimistic for almost six years. Around 59% of the survey panel forecast a rise in activity over the course of 2021, while only 13% predict a decline.

The headline seasonally adjusted UK Services PMI posted 49.4 in December, up from 47.6 in November but still below the 50.0 no change threshold. Moreover, the downturn in service sector output recorded on average in the final quarter of 2020 (49.5) contrasted with a solid pace of recovery during the third quarter (57.1).

Companies reporting a decline in business activity in December almost exclusively cited shrinking client demand and restrictions on trade due to the COVID-19 pandemic. Where growth was reported, this was mostly confined to residential property, business-to-business services (especially e-commerce), and providers of digital consumer services. December data indicated a fall in total new business across the UK service sector for the third consecutive month, reflecting a general reluctance to spend among clients. That said, the latest decline in new work was only modest and much softer than seen during the initial lockdown period in the first half of 2020.

At 50.4 in December, the UK Composite Output Index edged up from 49.0 in November and registered slightly above the 50.0 no-change threshold. The overall rise in UK private sector output reflected a strong contribution from manufacturing production (index at 55.9 in December). In contrast, service sector activity decreased again in the latest survey period (49.4).