UK’s private sector economy grew faster than expected in August

The private sector economy expanded more quickly than expected last month, but businesses have expressed concerns about possible tax rises in Rachel Reeves’s first budget.

The final S&P Global composite purchasing managers’ index (PMI) rose to 53.8 in August from 52.8 in July, well above analysts’ expectations for an increase to 53.4. The figure, a four-month high, was above the 50-point threshold that separates growth from contraction.

Services activity also grew at a faster pace, with the sector’s PMI reading edging up to 53.7 from 52.5. The final manufacturing reading posted at 52.5.

Analysts said that greater political stability since the general election in July and more settled macroeconomic conditions lifted consumer spending. Expectations for further interest rate cuts by the Bank of England also supported demand.

Inflation in prices charged by services companies, closely watched by the Bank, slipped to a three-and-a-half-year low, while input cost inflation was the weakest since January 2021. Official estimates from the Office for National Statistics showed that inflation edged up to 2.2 per cent in July from 2 per cent in June.

Tim Moore, economics director at S&P Global Market Intelligence, said: “August data highlighted a recovery in UK service-sector performance as improving economic conditions and domestic political stability helped to bolster customer demand.”

Latest GDP data showed that the economy expanded at the quickest pace in the G7 group of industrialised democracies in the first half of this year.

The PMI survey incorporates the responses of companies in the services sector, which includes hospitality, entertainment and culture, finance, insurance and property and business services.

Rob Wood, chief UK economist at Pantheon Macroeconomics, a consultancy, said that the PMI report showed that the Bank of England “can keep lowering interest rates”, but that the pace of loosening should be cautious.

Thomas Pugh, economist at RSM UK, said that the Bank “will be wary about growing demand for labour and with the economy seemingly ticking along nicely there is no urgency for another rate cut in September”.

Researchers at S&P Global said that services companies most commonly cited “strong wage pressures” as the source of rising costs, followed by an increase in shipping rates.

The central bank cut interest rates for the first time in more than four years on August 1 by 25 basis points to 5 per cent and is expected to lower them one or two more times this year.

In response to improving sales, services companies increased staffing last month, the eighth consecutive month of expansion. Exports were “subdued” last month, researchers said, adding that “Brexit-related trade difficulties were again cited as holding back sales to EU clients”.

However, despite the uptick in economic activity, pressure on households’ disposable incomes held back demand. Consumers are also taking advantage of high interest rates and opting to save rather than spend.

Although output accelerated in August, businesses’ expectations for future trading conditions were less optimistic, which analysts attributed to anxieties about the possibility of tax rises or spending cuts in the Labour government’s first budget next month.

Moore said: “The modest post-election bounce in business activity expectations faded, however, in August. Hopes of interest rate cuts and steady improvements in broader economic conditions helped to support confidence, but some firms cited concerns about policy uncertainty in the run-up to the autumn budget.”

Reeves, the chancellor, has said that she must take “tough decisions” on tax, spending and benefits in her inaugural fiscal statement on October 30, citing the need to bear down on a £22 billion deficit. There is speculation that she will try to raise revenue by tweaking the capital gains and inheritance tax regimes. Economists have expressed concern about her decision to scale back investment projects in July and keep budgets for some government departments austere.

Under plans inherited from Jeremy Hunt, the former Tory chancellor, unprotected government departments faced £20 billion of budget cuts in real terms.