UK services sector contracts at steepest pace since 2023, PMI shows

LONDON (Reuters) -Britain's services sector, accounting for much of the economy, shrank in April for the first time since October 2023 and at the fastest pace in more than two years, according to a survey that showed U.S. tariff turmoil is hammering exports and sentiment.

The S&P Global UK Services Purchasing Managers Index dropped to 49.0 last month from March's 52.5, the steepest pace of decline since January 2023 although it was marginally above a preliminary reading for April of 48.9.

New orders and employment both fell more sharply than in March, while input cost pressures increased at the fastest rate since July 2023 - something the Bank of England is likely to note ahead of its interest rate meetings this week.

Survey compiler S&P Global said the faster input inflation reflected a rise in payroll taxes introduced by British finance minister Rachel Reeves and a nearly 7% increase in the minimum wage. The monthly fall in hiring was the seventh in a row.

"UK service sector output slipped into contraction for the first time in one-and-a-half years as heightened business uncertainty weighed on order books during April," Tim Moore, economics director at S&P Global Market Intelligence, said.

"Survey respondents often commented on the impact of global financial market turbulence in the wake of US tariff announcements."

Overseas orders fell by the most since February 2021, largely due to the challenging market conditions and hesitancy among firms caused by U.S. President Donald Trump's tariffs.

A PMI survey last week for British manufacturing showed export orders fell at the sharpest pace since May 2020.

Prices charged by services firms climbed by the most in almost two years, S&P said.

The BoE is expected to reduce its benchmark Bank Rate to 4.25% from 4.5% on Thursday and investors are wondering if the central bank will signal a quicker pace of cuts further ahead.

BoE policymakers have said Trump’s trade policies will hit growth although the impact on inflation is not yet clear.

The International Monetary Fund last month cut its forecast for British economic growth in 2025 to 1.1% from a previous estimate of 1.6%, but said the country was likely to grow more strongly than its peers in Europe including France and Germany.

The PMI’s gauge of output expectation for the year ahead fell sharply to its lowest since October 2022. Respondents cited a combination of the rising payroll costs, cutbacks to non-essential spending by clients and fears of a global recession.

The composite PMI - which combines the services data with last week's manufacturing survey - fell in April to 48.5 from 51.5 in March, its lowest reading since September 2023 but slightly revised up from a flash estimate of 48.2.

(Reporting by Suban Abdulla; Editing by William Schomberg and Toby Chopra)