The UK’s private sector economy advanced more robustly than anticipated in August. This performance was marked by a series of key economic metrics.
- The S&P Global composite purchasing managers’ index (PMI) climbed from 52.8 in July to 53.8 in August, surpassing expectations.
- Services sector saw accelerated growth with its PMI rising to 53.7, and the final manufacturing PMI stood at 52.5.
- Economic stability post-general election and potential interest rate cuts by the Bank of England spurred consumer spending.
- Despite positive growth, businesses are cautious due to potential tax hikes in the upcoming Labour budget.
The UK’s private sector economy experienced a notable uptick in August, as reflected in the S&P Global composite purchasing managers’ index (PMI), which increased to 53.8 from 52.8 in July. This exceeded analysts’ predictions of 53.4 and marked a four-month high, indicating expansion.
The services sector also recorded accelerated growth, with its PMI rising to 53.7 from 52.5. Moreover, the final manufacturing PMI stood at 52.5. Analysts attributed this growth to increased political stability following the July general election and a more stable macroeconomic environment, which boosted consumer spending. The prospects of further interest rate cuts by the Bank of England also enhanced demand.
Inflation in prices charged by services companies fell to its lowest level in three and a half years, accompanied by the weakest input cost inflation since January 2021. Official data from the Office for National Statistics showed a slight increase in inflation to 2.2% in July from 2% in June. Tim Moore, economics director at S&P Global Market Intelligence, noted, “August data highlighted a recovery in UK service-sector performance as improving economic conditions and domestic political stability helped to bolster customer demand.”
Recent GDP data revealed that the UK economy grew at the fastest rate among the G7 industrialised nations during the first half of the year. The PMI survey collects insights from a range of companies in the services sector, including hospitality, entertainment, finance, insurance, property, and business services. Rob Wood, chief UK economist at Pantheon Macroeconomics, stated that the PMI figures suggest the Bank of England “can keep lowering interest rates,” though he advised caution regarding the pace of such easing.
Meanwhile, Thomas Pugh, economist at RSM UK, indicated cautious optimism regarding labour demand and the current stable performance of the economy, which may reduce the urgency for another rate cut in September. According to S&P Global, services companies cited “strong wage pressures” and rising shipping rates as the primary factors driving increased costs. The Bank of England reduced interest rates by 25 basis points to 5% on August 1, for the first time in over four years, and is expected to enact further cuts later in the year.
In response to stronger sales, services firms increased staffing levels in August for the eighth consecutive month. However, exports remained subdued due to ongoing “Brexit-related trade difficulties” affecting sales to EU clients. Despite the rise in economic activity, household disposable incomes continued to face pressure, leading many consumers to choose saving over spending amidst high interest rates.
Although output growth accelerated in August, business expectations for future trading conditions were cautious. Analysts attributed this to concerns over potential tax hikes or spending cuts in the forthcoming Labour budget. Tim Moore observed, “The modest post-election bounce in business activity expectations faded, however, in August. Hopes of interest rate cuts and steady improvements in broader economic conditions helped to support confidence, but some firms cited concerns about policy uncertainty in the run-up to the autumn budget.” Chancellor Reeves has indicated the need for “tough decisions” on tax, spending, and benefits in her fiscal statement set for October 30, to address a £22 billion deficit.
Speculation surrounds Chancellor Reeves’s potential tax adjustments, particularly concerning capital gains and inheritance tax regimes. Economists have raised concerns over her decision to reduce investment projects and maintain austerity in some government department budgets. Inherited plans from former Chancellor Jeremy Hunt include £20 billion in real-term budget cuts for unprotected government departments, adding additional pressure on public spending as the Labour government navigates the complex economic landscape.
The UK private sector’s August performance, although remarkable, is met with cautious optimism amid potential fiscal policy changes.
