The UK’s services sector saw its weakest performance since the start of the year last month as sluggish business conditions and consumers cutting back on spending continued to drag on the level of work.

A closely watched survey found that jobs in the industry were shed at the fastest rate since 2021.

The S&P Global/CIPS UK services PMI survey showed a reading of 49.3 in September, down from 49.5 in August.

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

Nevertheless, the reading came in above the flash estimate figure of 47.2 for the latest month.

Activity in the industry – which spans services from hospitality, leisure and entertainment to healthcare, transport and financial services – took a downturn in August after a strong spring.

Higher borrowing costs have begun to take a toll on consumer demand, with the squeeze on households leading people to cut back on non-essential spending, the survey found.

It comes as UK interest rates remained unchanged at 5.25% last month, signalling some hope to businesses that rates could be nearing a peak.

Furthermore, the survey found that businesses shed jobs at the fastest rate since the start of 2021, due to lower hiring budgets and deciding not to replace staff who leave.

Tim Moore, the economics director at S&P Global Market Intelligence, said: “Service sector activity remained on a negative trajectory in September as cutbacks to non-essential business and consumer spending weighed on sales volumes.

“Survey respondents often suggested that a combination of elevated borrowing costs and subdued economic conditions had led to lower new business intakes.

“A renewed decline in export sales also acted as a headwind to order books during September, led by weaker demand across Europe.”

Nevertheless, hopes that inflationary pressures have begun to come down promoted more optimism among service sector companies last month for the future of their business.

UK inflation slowed to 6.7% in August, according to official figures, and the Bank of England is expecting the level to fall “sharply” by the end of the year.

Businesses expectations of activity in the year ahead edged up to a three-month high in September, and significantly higher than the same time last year.

Firms reported feeling more optimistic about inflation easing, customer demand rebounding, as well as new product launches and business investment plans.

However, elevated borrowing costs and stretched household budgets were still a concern, while higher wage bills and fuel costs continued to put pressure on firms across the sector.

Dr John Glen, chief economist at the Chartered Institute of Procurement & Supply (CIPS), said: “The UK economy is still showing signs of strain and the impact of interest rate rises are having an effect.

“Consumers are concerned by the higher cost of living and expenses continuing to rise, especially fuel costs, and are reining in spend accordingly.”