UK services firms provide relief to Reeves before tough budget update

LONDON (Reuters) - Businesses in Britain's huge services sector reported a pickup this month, according to a survey that offered some comfort to finance minister Rachel Reeves ahead of a challenging speech on the economy and the public finances this week.

Monday's preliminary reading of the UK S&P Purchasing Managers' Index (PMI) for the services sector hit a seven-month high of 53.2 in March, up from 51.0 in February.

But the smaller manufacturing PMI sank to an 18-month low of 44.6 from 46.9 in February, as worries about a global trade war ignited by U.S. President Donald Trump's tariffs hammered expectations for future output.

Manufacturing export sales suffered their biggest fall since August 2023.

The overall composite PMI - covering both sectors - rose to a six-month high of 52.0 from February's 50.5.

Chris Williamson, chief business economist at S&P Global Market Intelligence, said the survey suggested Britain's economy was on course to grow by a still marginal 0.1% in the first three months of 2025.

Firms cut jobs again as they braced for April's increase in a tax on employers and for the minimum wage to rise by almost 7% next month too. Firms mentioned investment in automation as one of their responses to the hike.

However, the pace of staff reduction slowed noticeably from February.

"Confidence is still running close to January’s two-year low," Williamson said. "The improvement is also being driven by only small pockets of growth, notably in financial services, with consumer-facing business and manufacturers continuing to struggle against headwinds both at home and abroad."

Reeves is expected to announce on Wednesday a sharp downgrade to the UK's economic growth this year which, along with higher borrowing costs, is likely to force her to cut her plans for spending increases in the coming years.

Monday's PMI survey showed input costs paid by businesses rose at a slower pace this month. They increased the prices they charged at the same speed as in February, in part to offset the increase in employment costs from next month.

The Bank of England is watching closely for the impact of the increase in employers' social security contributions which Reeves announced in her first budget last October. It warned last week that it might pause its pattern of cutting interest rates once every three months that has held since last October.

The manufacturing PMI's gauge of future output fell by the most since records started in 2012, excluding the first imposition of COVID-19 lockdowns in March 2020.

"There were many concerns about U.S. tariffs and gloomy forecasts for export sales due to volatility in global markets," S&P Global said.

(Writing by William Schomberg; Editing by Toby Chopra)