Interest rate rises expected later this year will weaken a UK economy that is already expanding at its slowest pace since it began to emerge from lockdown in 2021, the latest snapshot of activity suggests of the private sector.
Although it slightly outperformed the eurozone or the US, the latest S&P Global/Chartered Institute of Procurement and Supply (Cips) monthly survey showed that both the UK’s services and manufacturing sectors they were struggling to cope with rising cost-of-living pressures.
Pressure on industry from higher commodity prices led to the first contraction in manufacturing output since the early stages of the pandemic in May 2020.
However, the survey showed signs of a decline in global price pressures that have contributed to the UK’s 9.4% inflation rate, the highest in 40 years. Input cost prices fell for a second month and were at their lowest level since September 2021.
Businesses responding to the survey reported that lower commodity prices, particularly metals, had started to have an impact, but service sector companies mostly said that intense wage pressures due to the Staff shortages and rising consumer price inflation had continued to increase their costs.
Still, analysts said there was evidence of a turning point. Samuel Tombs, UK economist at consultancy Pantheon Macro, said the Bank of England would welcome news of easing cost pressures and that businesses would moderate the pace of price rises due to the weak demand
The Bank’s governor, Andrew Bailey, has said a half-point rise in borrowing costs is a possibility next month, but the S&P/Cips Purchasing Managers’ Index suggests Threadneedle Street would be tightening policy in a at a time when the economy is at its most vulnerable. in 17 months.
The survey showed that services sector activity fell from 54.3 to 53.3 in June, while manufacturing fell from 50.3 to 49.7, while the composite output index falling from 53.7 in June to 52.8 in July. A reading below 50 suggests contraction rather than expansion.
Attempts to clear the order backlog meant that employment continued to grow, but the survey showed that the pace of new job creation slowed.
Chris Williamson, chief economist at S&P Global Market Intelligence, said: “UK economic growth slowed in July, recording the slowest expansion since the lockdowns at the start of 2021.
“Although not yet down, with pent-up demand for vehicles and consumer-oriented services such as travel and tourism helping to sustain growth in July, the PMI is now at a level consistent with only growth in 0.2% of GDP. Future indicators suggest worse to come.”
Separate PMIs indicated that the US and the Eurozone were already in recession. The US composite PMI fell from 52.3 to 47.5 in July, its lowest level in 26 months. The rate of decline in manufacturing and services was the steepest since the start of the pandemic, due to falling demand.
Inflation currently stands at 9.1% in the US and its central bank, the Federal Reserve, has raised interest rates in response. Official borrowing costs rose 0.75 percentage points last month and a similar-sized jump is expected on Wednesday.
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Meanwhile, the eurozone composite index fell from 52.0 in June to 49.4 in July, with softening activity particularly evident in a fall from 51.3 to 48 in Germany, the largest economy big in europe The French economy weakened, but remained above the recession cut-off point of 50.
The European Central Bank raised interest rates by 0.5 percentage points on Thursday, and there is now strong speculation that the Bank of England will announce a similar increase on August 4. Williamson said there were risks involved.
“The concern is that rising interest rates, as the Bank of England seeks to control inflation, will cause demand growth to weaken further in the coming months. at a time of such weak business growth is unprecedented in the last quarter century of the survey’s history,” he said.