PMI survey signals softer expansion in January as demand cools, even while firms continue to hire in anticipation of future activity

Spain’s vast services sector entered the new year on a weaker footing, according to a closely watched purchasing managers’ survey that points to slowing momentum after months of steady expansion.

Data from the latest services Purchasing Managers’ Index (PMI) show that activity continued to grow in January, but at the slowest pace seen in seven months. The reading remained above the threshold that separates growth from contraction, indicating that the sector is still expanding, albeit more cautiously than at the end of last year.

The loss of speed reflects a more challenging demand environment. Survey respondents reported a noticeable softening in new business, with clients showing greater hesitation in committing to fresh projects. Export-related activity also weakened, suggesting that slower conditions in key international markets are beginning to weigh on Spanish service providers.

Companies across tourism, transport, professional services and consumer-facing industries described a more competitive landscape, with pricing pressures and cautious customer behaviour limiting the flow of new orders. Some firms pointed to tighter budgets among corporate clients, while others cited uncertainty in the broader European economic outlook as a factor dampening cross-border demand.

Despite the moderation in growth, the sector has not shifted into retrenchment mode. Employment continued to rise in January, as companies added staff in anticipation of a pickup in activity later in the year. This willingness to hire suggests that businesses view the current slowdown as temporary rather than structural.

Managers surveyed indicated that backlogs of work, while no longer rising as quickly, remain sufficient to justify maintaining or expanding payrolls. In several cases, firms reported hiring to address skill shortages or to improve service quality, rather than to respond directly to immediate demand.

Cost pressures showed signs of easing compared with previous months, offering some relief to service providers after a prolonged period of elevated expenses. However, margins remain under strain, particularly for smaller firms with limited pricing power. While some businesses managed to pass on higher costs to customers, others opted to absorb them in order to remain competitive.

Looking ahead, sentiment within the sector remains cautiously optimistic. Expectations for future activity are still positive, supported by hopes of stronger domestic consumption and a stabilisation in external demand. Nonetheless, confidence has edged down from recent highs, reflecting awareness that economic conditions remain fragile.

For policymakers, the latest PMI data present a mixed picture. The continued expansion of services provides reassurance that one of Spain’s key economic engines is still running, but the slowdown underscores the need for vigilance as the year unfolds. Much will depend on whether demand regains momentum in the coming months or whether January’s softer performance marks the start of a more prolonged cooling phase.

As Spain moves further into the year, the services sector appears to be navigating a delicate balance: slowing growth and weaker demand on one hand, and sustained hiring and underlying resilience on the other. The coming months will reveal whether optimism among firms is rewarded or tested by a more challenging economic landscape.