Britain’s services sector returned to tepid growth last month after jitters about Donald Trump’s tariffs caused the sector to shrink in April for the first time in a year and a half.

The closely-watched S&P Global Purchasing Managers’ Index for Britain’s services sector increased to 50.9 in May from 49.0 in April, and above an earlier flash estimate of 50.2.

The upward revision also lifted the composite PMI, which includes the smaller manufacturing sector, taking it above the 50 mark which divides growth from contraction.

Tim Moore, S&P’s global economics director, said: ‘Receding concerns about US tariffs, recovering global financial markets and greater confidence among clients all helped to support output growth.’

April’s sharp drop in export orders substantially reversed itself while overall new orders also fell at a slower rate than the month before, helping lift expectations for future output to their highest since October.

Britain’s economy grew by a stronger-than-expected 0.7 per cent in the first quarter of this year but the Bank of England said on Tuesday that it expected growth to slow, partly due to the downbeat message from a range of business surveys.

Thomas Pugh, economist at RSM, UK said the combination of a rolling back of some US tariffs, a recovery in financial markets and stronger PMIs #suggests the economy began to recover in May’.

He added: ‘The positive news was that business sentiment across the economy seems to have rebounded.

‘What’s more, the input and output cost balances both dropped sharply, suggesting that the jump in employment costs in April aren’t continuing to put upward pressure on prices.’

But Pugh cautioned that growth is ‘likely to be bumpy this year’ with Britain facing tariffs, uncertainty and taxes that it didn’t have in the first quarter, which ‘probably marked the highpoint for the year’.

The latest PMI figures showed continued pressure on businesses from labour costs, reflecting a near 7 per cent increase in the minimum wage and an increase in employers’ national insurance contributions.

Both increases, which are the result of last year’s budget, most affect firms employing large numbers of lower-paid or part-time staff.

Businesses have cut staff numbers in each of the past eight months – largely by not replacing staff who left – although May’s pace of decline was the smallest in six months.

Firms’ costs rose less than in April but still at a rapid pace, which they again largely attributed to higher labour costs, while prices charged rose at the slowest rate in seven months due to increased competitive pressures.

That is likely to reassure the Bank of England, which is concerned that rapid wage growth will make it hard to get inflation back to its 2 per cent target.

S&P’s Moore said: ‘The service sector regained its poise in May as receding concerns about US tariffs, recovering global financial markets and greater confidence among clients all helped to support output growth.

‘Although only marginal, the upturn in service sector activity was stronger than first estimated in May.

‘Output growth expectations for the year ahead also rebounded after April’s tariff-related slump.

‘Optimism reached its highest level since October 2024, which reflected forthcoming business investment plans alongside hopes of a turnaround in sales pipelines and improving domestic economic prospects.’

He added: ‘While rising wages were again the most commonly reported factor pushing up input prices, the overall rate of cost inflation eased from April’s 21-month high.

‘Softer cost inflation and intense competitive pressures contributed to the slowest rise in price charged by service providers since last October.’

On Tuesday, Bank of England governor Andrew Bailey suggested dreary business surveys indicated the economy looked set to weaken.

In an appearance in front of the Treasury Select Committee, Bailey said: ‘We have had more volatile short run GDP numbers of late.

‘The challenge we have at the moment is that the forward-looking sort of evidence on activity in the economy – so the surveys – are nothing like as strong as that.’

The governor described a ‘disjoint’ between official growth data and forward-looking expectations.