The UK’s private sector economy has shown a surprising rate of growth in August, with the Purchasing Managers’ Index (PMI) reaching a four-month high, alleviating some concerns amidst ongoing tax uncertainties.
The S&P Global composite PMI increased to 53.8 in August from 52.8 in July, surpassing analysts’ expectations of 53.4. A PMI reading above 50 signifies economic expansion. The services sector PMI also demonstrated notable growth, rising to 53.7 from 52.5, while the final manufacturing PMI reached 52.5.
Analysts have attributed this growth to greater political stability following the general election in July and improved macroeconomic conditions, leading to increased consumer spending. Expectations of further interest rate cuts by the Bank of England have also spurred demand. Inflation in the prices charged by services companies, which the Bank closely monitors, fell to its lowest level in three and a half years. Furthermore, input cost inflation has hit its weakest point since January 2021.
In contrast, official data from the Office for National Statistics indicated that inflation edged up slightly to 2.2% in July from 2% in June. Tim Moore, economics director at S&P Global Market Intelligence, commented: “August data highlighted a recovery in UK service-sector performance as improving economic conditions and domestic political stability helped to bolster customer demand.”
GDP data revealed that the UK economy grew at the fastest rate among the G7 nations during the first half of this year. The PMI survey, which gathers insights from various industries within the services sector—including hospitality, entertainment, finance, insurance, property, and business services—reflected a broad-based expansion.
Rob Wood, chief UK economist at Pantheon Macroeconomics, noted that the PMI figures suggest the Bank of England “can keep lowering interest rates,” although he advised caution on the pace of easing. Similarly, Thomas Pugh, economist at RSM UK, asserted that while the Bank may be wary of the growing demand for labour, the steady economic performance mitigates the urgency for another rate cut in September.
Strong wage pressures and rising shipping rates were identified as primary drivers of increased costs by services companies, according to S&P Global. The Bank of England made its first interest rate cut in over four years on August 1, reducing the rate by 25 basis points to 5%, with further cuts anticipated later in the year. Services firms responded to stronger sales by increasing staffing levels in August, marking the eighth consecutive month of expansion. However, exports remained subdued due to ongoing “Brexit-related trade difficulties” affecting sales to EU clients.
Despite the uptick in economic activity, pressure on household disposable incomes continued to suppress demand as many consumers save rather than spend in response to 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 rises or spending cuts in the upcoming Labour budget.
Tim Moore observed that the modest post-election bounce in business activity expectations waned in August. He remarked that while there were hopes for interest rate cuts and steady improvements in economic conditions, “some firms cited concerns about policy uncertainty in the run-up to the autumn budget.” Chancellor Rachel Reeves has signalled the need for “tough decisions” on tax, spending, and benefits in her fiscal statement scheduled for October 30, as she addresses a £22 billion deficit. Speculation is rife that Reeves may seek to increase revenue by adjusting the capital gains and inheritance tax regimes.
Economists have voiced concerns over her decision to scale back investment projects in July while maintaining austerity in some government department budgets. Plans inherited from former Chancellor Jeremy Hunt include £20 billion in real-term budget cuts for unprotected government departments, adding further pressure on public spending as the Labour government contends with the complex economic landscape.
The UK’s private sector unexpectedly outpaced growth expectations in August, but businesses remain cautious amid looming fiscal challenges and potential tax hikes in the upcoming budget. The interplay between consumer behaviours, government policies, and global economic conditions will continue to shape the landscape.