The UK’s services sector saw a lacklustre October with activity falling for the third month in a row as businesses continue to “skirt with recession”, an influential survey has found.

The S&P Global/CIPS UK services PMI survey showed a reading of 49.5 in October, up fractionally from 49.3 in September and coming in above the flash estimates of 49.2 for the month.

Any score below 50 indicates that activity in the industry has been contracting.

The industry, which spans services from hospitality, leisure and entertainment, to healthcare, transport and financial services, has been grappling with higher business costs and squeezed household budgets.

It is leading to weaker demand and therefore less new work for services providers.

Despite last month’s downturn being only marginal, optimism among firms has dropped to the lowest level since December last year with tougher business conditions taking a heavy toll, the survey found.

Less than half of services businesses say they are expecting activity to rise in the year ahead.

Tim Moore, economics director at S&P Global Market Intelligence, said: “A shallow downturn in UK service sector activity persisted in October as businesses struggled to make headway against a backdrop of worsening domestic economic conditions and stretched household budgets.

“Forward-looking survey indicators suggested that service providers will continue to skirt with recession.

“The degree of optimism towards the business outlook was the lowest in 2023 so far, despite relief that interest hikes have taken a pause this autumn.”

The latest PMI data suggests the UK economy is “flirting with a mild recession”, but one which is likely to be narrowly avoided, said Samuel Tombs, chief UK economist for Pantheon Macroeconomics.

“Decreasing confidence about the outlook for demand prompted businesses in the services and manufacturing sectors to collectively reduce employment for a second consecutive month, albeit at a mild pace,” he said.

The survey found that job cutting continued last month, with some reports of firms making redundancies or not replacing staff leaving because of weaker sales and worries about demand staying subdued.

But Mr Tombs said the PMI survey could be giving a bleaker picture of the sector than other surveys which suggest consumer confidence is more resilient as wage growth outpaces inflation.

Furthermore, there was good news with inflation continuing on a downward trend.

Business costs increased at the slowest rate since February 2021 last month, as falling raw material prices and supplier discounting helped reduce pressure on firms.

It comes after the Bank of England kept UK interest rates steady at 5.25% in a decision announced on Thursday, and said Consumer Prices Index (CPI) inflation is set to have fallen sharply last month.