The UK’s private sector demonstrated surprising resilience in August, surpassing expectations despite looming fiscal challenges. Here are the key highlights from this economic development:
- The S&P Global composite purchasing managers’ index rose to 53.8 in August, marking a four-month high.
- Political stability and favorable macroeconomic conditions after the July election boosted consumer confidence, enhancing demand.
- Inflation for services saw a notable drop to its lowest level in three and a half years, a positive sign amid ongoing cost pressures.
- The Bank of England’s interest rate cuts played a part in this growth, with further reductions anticipated.
- Cautious outlooks persist due to potential tax increases or spending cuts in the upcoming Labour budget.
In August, the UK’s private sector outperformed expectations with the S&P Global composite purchasing managers’ index reaching 53.8, up from 52.8 in July. This exceeded analysts’ projections of 53.4 and marked the highest level in four months. A reading above 50 signifies expansion, indicating a healthy economic environment.
The services sector notably contributed to this growth, with its PMI advancing to 53.7 from 52.5. The final manufacturing PMI also stood at 52.5. Analysts attribute this positive trend to the enhanced political stability following the general election in July and improved macroeconomic conditions, which have spurred consumer spending.
Service companies experienced a fall in inflation for prices charged, reaching its lowest point in over three years. Input cost inflation also diminished, reaching levels not seen since January 2021. However, inflation edged slightly higher to 2.2% in July, up from 2% in June, according to the Office for National Statistics. 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.’
The UK economy showed the fastest growth rate among the G7 nations in the first half of the year, bolstered by expectations of further interest rate reductions by the Bank of England, which lifted demand. The Bank made its first interest rate cut in over four years on August 1, reducing rates by 25 basis points to 5%. Services firms responded to stronger sales by hiring more staff, marking an eighth consecutive month of job expansion.
However, exports continued to struggle due to ‘Brexit-related trade difficulties’ affecting EU sales. Despite an uptick in activity, consumer demand remained under pressure due to high interest rates, with many opting to save money instead of spending. Future trading conditions appeared cautious, influenced by speculation over potential tax hikes or spending cuts proposed in the Labour budget.
Chancellor Rachel Reeves has signaled the need for ‘tough decisions’ on tax and spending in her forthcoming fiscal statement, as she tackles a £22 billion deficit. Speculation suggests Reeves might adjust capital gains and inheritance tax regimes to increase revenue. These financial challenges are compounded by plans for £20 billion in real-term budget cuts for unprotected departments, inherited from former Chancellor Jeremy Hunt.
The UK private sector’s strong performance in August is tempered by concerns over impending fiscal policies and economic uncertainties.
