Key Takeaways

  • The UK Services PMI for December 2025 was revised down to 51.4 from the 52.1 flash estimate, indicating a softer-than-expected pace of expansion.
  • A renewed upturn in new orders provided a glimmer of hope, but was offset by a seven-month high in input cost inflation and another round of job cuts.
  • The data presents a 'stagflation-lite' dilemma for the Bank of England, complicating the policy path and creating distinct trading opportunities in FX and rates markets.

UK Service Sector Ends 2025 on a Weaker Note

The final S&P Global/CIPS UK Services PMI for December 2025 came in at 51.4, a notable downward revision from the preliminary 'flash' estimate of 52.1. While this still indicates expansion (any reading above 50.0), it marks a marginal and disappointing end to the year. The prior November reading was 51.3. The downward revision signals that the initial optimism captured in the flash survey did not hold, revealing underlying fragility. The Composite PMI, which combines services and manufacturing, was also finalized at 51.4, down from the 52.1 flash, with a prior of 51.2.

This data paints a picture of an economy stuck in a low-growth gear. As Tim Moore, Economics Director at S&P Global Market Intelligence, noted, the speed of expansion was "softer than signalled" and lower than the average for the second half of the year. The service sector, which dominates the UK economy, is struggling to build meaningful momentum against a backdrop of persistent headwinds.

Dissecting the December Report: Glimmers and Gloom

The report was a classic mixed bag, but the negative elements carried significant weight for future prospects.

The Positive: A Fragile Rebound in Demand
The primary bright spot was a return to growth in new orders, following a slight dip in November. Firms reported "tentative signs of a recovery in client confidence after an extended period of pre-Budget gloom." This suggests that some uncertainty hanging over the economy may have begun to dissipate following fiscal policy announcements. A marginal rebound in export sales also contributed, though demand from major overseas markets remained broadly soft.

The Negative: Inflation and Employment Concerns
These demand positives were overwhelmingly countered by two critical negatives:

  • Accelerating Cost Pressures: Input cost inflation surged to a seven-month high. Service providers faced sharply rising expenses for wages, energy, and other inputs. Crucially, despite "subdued demand," firms felt compelled to pass these costs on, leading to a rebound in output charge inflation from November's low. This stickiness in services inflation is a major red flag for the Bank of England.
  • Ongoing Job Shedding: For another month, service sector employment fell markedly. Businesses cited "worries about squeezed margins and broader growth prospects" as the reason. This is a leading indicator; companies do not cut jobs if they are confident about future activity. It points to a defensive, cost-cutting mindset that will dampen consumer spending power.

What This Means for Traders

This PMI revision is more than a minor data point adjustment; it recalibrates the narrative for UK assets at the start of 2025.

For FX (GBP Traders): The Pound is caught in a crosscurrent. The weaker growth component (lower PMI) is inherently GBP-negative. However, the surge in input and output prices complicates the picture. Traders should watch for a two-tiered reaction: initial knee-jerk GBP weakness on the growth miss, potentially followed by resilience or even strength if markets focus on the inflation elements and delay expectations for Bank of England (BoE) rate cuts. The key will be whether the market prioritizes 'stag' or 'flation'. Trading ranges for GBP/USD and GBP/EUR may contract as participants await clearer signals.

For Rates and Fixed Income: Gilts and short-sterling futures will be highly sensitive. The inflation data is a hawkish input, suggesting the BoE's last mile in bringing inflation sustainably to target will be arduous. This could lead to a steepening of the yield curve—short-dated yields may rise on delayed cut expectations, while long-dated yields might be capped by the weak growth outlook. Traders should reassect pricing for the timing of the first 2025 rate cut; this report may push expectations from Q1 toward Q2.

For Equity Sector Traders: The report suggests a challenging environment for consumer-facing service stocks (retail, leisure, travel). Rising costs and cautious consumers squeeze margins. Conversely, companies with strong pricing power or those in essential services may demonstrate relative resilience. The ongoing job cuts in the sector could be a precursor to broader economic softening, warranting a cautious stance on cyclical UK equities.

The Bank of England's Tightrope Walk

This PMI delivers the worst of both worlds to the Monetary Policy Committee (MPC): fading growth momentum and re-accelerating price pressures, particularly in the domestically-driven service sector where inflation persistence is most acute. It validates the BoE's cautious, data-dependent stance and argues against any premature pivot to an aggressive easing cycle.

The MPC will likely interpret this as evidence that the economy remains fragile and that underlying inflationary pressures, especially from wages and services, are not yet definitively broken. Their communications will continue to emphasize the need for restrictive policy to remain in place until there is unequivocal evidence that inflation is defeated, even as growth sputters.

Conclusion: A Fragile Foundation for 2025

The downward revision of the December UK Services PMI sets a cautious tone for the new year. It reveals an economy caught between a flicker of recovering demand and the harsh realities of persistent cost inflation and business pessimism strong enough to trigger further job losses. For traders, this creates a landscape defined by conflicting signals and heightened sensitivity to incoming data.

The path forward will hinge on whether the tentative rebound in new orders can gain strength and outweigh the corrosive effects of inflation and employment cuts. All eyes will now turn to upcoming wage growth data, the next CPI print, and the BoE's rhetoric. The UK economy is not rolling over, but it is failing to accelerate, all while inflation proves stubborn. This 'muddle-through' scenario with an inflationary bias is likely to sustain volatility and create nuanced trading opportunities across asset classes in the months ahead.