Britain’s private sector economy grew faster than expected in August, with businesses expressing concerns about possible tax rises in Chancellor Rachel Reeves’ upcoming first budget.
S&P Global’s composite purchasing managers’ index (PMI) rose to 53.8 in August from 52.8 in July, beating analyst forecasts of 53.4 and reaching a four-month high. A reading above 50 indicates expansion.
The services sector also experienced accelerated growth: the PMI rose from 52.5 to 53.7, while the final PMI for the manufacturing sector amounted to 52.5. Analysts attributed the growth to greater political stability following the July general election and more stable macroeconomic conditions, which boosted consumer spending. In addition, expectations of further interest rate cuts by the Bank of England increased demand.
Inflation in prices charged by service industries, a key measure tracked by the Bank, has fallen to its lowest level in three and a half years, with input cost inflation at its weakest point since January 2021 reaches. Meanwhile, official figures from the Office for National Statistics have been published. indicate that inflation rose slightly from 2% in June to 2.2% in July.
Tim Moore, economics director at S&P Global Market Intelligence, commented: “August figures pointed to a recovery in the performance of the UK services sector as improving economic conditions and domestic political stability helped strengthen customer demand.”
Recent GDP data shows that the UK economy grew the fastest among the G7 group of industrialized countries in the first half of this year. The PMI survey collects insights from companies in the service sector, including sectors such as hospitality, entertainment, finance, insurance, real estate and business services.
Rob Wood, chief Britain economist at Pantheon Macroeconomics, noted that the PMI figures suggest the Bank of England “could continue to cut rates,” although he advised caution on the pace of easing. Similarly, Thomas Pugh, economist at RSM UK, indicated that while the Bank may be cautious about growing labor demand, the economy’s steady performance reduces the urgency for another rate cut in September.
According to S&P Global, service companies cited “strong wage pressures” and rising shipping costs as the main drivers of higher costs. The Bank of England cut interest rates for the first time in more than four years on August 1, by 25 basis points to 5%, and is expected to make further cuts later this year.
Service companies responded to stronger sales by expanding workforces in August, marking the eighth consecutive month of expansion. However, exports remained subdued, with researchers pointing to ongoing “Brexit-related trade issues” affecting sales to EU customers.
Despite the rebound in economic activity, pressure on household disposable income continued to suppress demand. Many consumers are choosing to save rather than spend in response to high interest rates.
Although output growth accelerated in August, business expectations for future trading conditions were more cautious. Analysts attributed this to concerns about possible tax increases or cuts in the upcoming Labor budget. Moore noted, “The modest rebound in business activity expectations following the election faded in August. Hopes of rate cuts and steady improvements in broader economic conditions helped support confidence, but some businesses cited concerns about policy uncertainty ahead of the autumn budget.”
Chancellor Reeves has outlined the need for ‘tough decisions’ on tax, spending and benefits in her budget statement for October 30, as she tackles a £22 billion deficit. Speculation is rife that Reeves wants to increase revenues by tweaking the capital gains and inheritance tax regimes. Economists have raised concerns about her decision to scale back investment projects in July and maintain budget cuts in some ministries.
Plans inherited from former Chancellor Jeremy Hunt include £20 billion in budget cuts for unprotected government departments, further increasing pressure on public spending as the Labor government tries to navigate the complex economic landscape.