UK Services Jobs Fall as Firms Turn to Automation

The UK's dominant services sector cut jobs last month as companies increasingly opted for automation over hiring, a closely watched business survey has revealed. Despite a rebound in business activity, employment numbers fell more sharply in January than in December, extending a downward trend that began in October 2024.

According to the monthly Purchasing Managers' Index (PMI), this marks the "longest period of job shedding" for the services sector in 16 years. Firms are not only cutting jobs but also choosing not to replace staff who leave voluntarily.

The UK's services sector is the largest part of its economy, contributing nearly 80% of the country's output and covering industries from hotels and catering to finance and law.

The UK services sector, which includes major financial and legal firms, contributes nearly 80% to the country's economic output.

Technology and Costs Drive Job Cuts

The survey, compiled by S&P Global, found anecdotal evidence that companies are turning to automation to fill staffing gaps and increase productivity. This trend is amplified by squeezed profit margins and fragile market conditions that are dampening hiring decisions.

Tim Moore, economics indices director at S&P Global Market Intelligence, highlighted the pressure on businesses. "There were again gloomy signals for the UK labour market outlook as staff hiring decreased at a steeper pace in January as firms looked to offset rising payroll costs," he said.

The move toward automation has been particularly evident in specific industries. On Tuesday, Anthropic, the company behind the Claude chatbot, announced its tool could automate legal work. The news triggered a sharp sell-off in the shares of publishing and data companies, which began in London and continued across global markets into Wednesday, even as the FTSE 100 reached a record high.

These cost pressures are compounded by several other factors:

• Rises in the national living wage.

• Increases in employers' national insurance contributions since last April.

• Widespread inflation in energy and food prices.

• A recent shake-up of business rates, which has pushed up bills for some companies and drawn criticism of the government.

Business Activity Rebounds to 5-Month High

In a contrasting trend, overall business activity in the services sector had a strong start to 2026. After a weak final quarter, output rebounded to a five-month high.

The PMI survey's activity index rose to a balance of 54 in January, up from 51.4 in December. This marked the fastest pace of expansion since August, with any reading above 50 indicating growth.

When combined with the manufacturing PMI data for January, the overall reading showed that UK business activity hit a 17-month high.

What's Driving the Business Optimism?

The survey suggests the improvement was partly driven by a lift in sentiment following the budget in late November, which ended months of speculation about potential tax increases. This clarity allowed delayed projects and investment to move forward.

Expectations for a business upturn were also at their strongest since October 2024. That same month, Chancellor Rachel Reeves had imposed unexpectedly large tax rises on companies in her first budget, despite corporate concerns about geopolitical risks and weak consumer demand.