In August, the UK’s private sector economy exceeded forecasts despite looming tax concerns.
- The S&P Global composite PMI climbed to 53.8, outperforming predictions.
- Services and manufacturing sectors saw accelerated growth due to political stability.
- Inflation in prices charged by services firms reached a three-and-a-half-year low.
- Business confidence remains cautious amid potential tax hikes in the upcoming budget.
The United Kingdom’s private sector economy witnessed unexpected growth in August, defying prevalent concerns over potential tax hikes. The S&P Global composite Purchasing Managers’ Index (PMI) ascended to 53.8, exceeding analysts’ forecasts of 53.4 and achieving a four-month high. This index reading, above the neutral level of 50, signifies an expansion in economic activity.
The growth was primarily driven by the services sector, which experienced a substantial rise in its PMI to 53.7 from 52.5. Meanwhile, the final manufacturing PMI also stood robust at 52.5. Analysts have attributed this positive performance to enhanced political stability post the general election in July and a more settled macroeconomic environment, which collectively bolstered consumer spending. The anticipation of further interest rate cuts by the Bank of England further amplified demand.
Critically, inflation in prices charged by service companies declined to its lowest point in three and a half years, while input cost inflation reached its weakest level since January 2021. Contrastingly, the Office for National Statistics reported a slight increase in overall inflation to 2.2% in July from 2% in the previous month.
Tim Moore, economics director at S&P Global Market Intelligence, remarked on the recovery in the service sector, highlighting how the improving economic backdrop and domestic political stability reinvigorated customer demand. Significantly, recent GDP data has positioned the UK as the fastest growing economy among the G7 nations during the initial half of the year.
The PMI survey offers insights from companies within the services sector, extending across industries such as hospitality, entertainment, finance, insurance, property, and business services. Rob Wood, Pantheon Macroeconomics’ chief UK economist, indicated that the PMI figures suggest the Bank of England could continue to lower interest rates, albeit with caution concerning the pace.
Thomas Pugh, economist at RSM UK, observed that while there is caution regarding increasing labor demand, the steady economic performance minimizes immediate pressure for additional rate cuts in September. Nevertheless, S&P Global identified that services companies are contending with ‘strong wage pressures’ and rising shipping rates as key factors elevating costs.
As a response to improved sales, service firms increased staffing levels for the eighth consecutive month in August. However, exports remained sluggish, with ongoing ‘Brexit-related trade difficulties’ impacting sales to EU customers. Despite the progress in economic activity, pressure on household disposable incomes persisted, tempering demand as many consumers opted to save instead of spend, reacting to prevailing high interest rates.
Although there was an uptick in output growth in August, business outlooks for future trading conditions leaned towards caution. Analysts attribute this to concerns surrounding potential tax increases or spending cuts in the forthcoming Labour budget. Tim Moore noted the fading ‘modest post-election bounce’ in business activity expectations, despite supporting factors such as the hope for interest rate reductions and steady economic conditions.
Chancellor Reeves has acknowledged the necessity for ‘tough decisions’ on taxes, spending, and benefits in her fiscal announcement scheduled for October 30. Addressing a £22 billion deficit, speculation has arisen about potential revenue increases through modifications to the capital gains and inheritance tax structures. Economists have expressed apprehensions regarding her approach to scaling back investment initiatives in July and the sustained austerity in certain government department budgets, adding to the fiscal pressures facing the Labour administration navigating this intricate economic landscape.
The UK’s private sector economy showed resilience in August, but caution persists due to possible fiscal changes in the upcoming budget.
