UK private sector growth accelerated at the fastest pace in a year this month, providing mild relief for Rachel Reeves after inflation rose quicker than expected to a 19-month high.
The closely watched flash S&P Global composite purchasing managers’ index (PMI) climbed to 53 in August from 51.5 in the previous month, staying above the 50-point mark that signals growth in the private sector for the fourth month in a row.
It was the highest PMI since August last year. Analysts had expected a reading of 51.6 in the month.
Stronger growth was driven by the services sector, which generates about 80 per cent of UK gross domestic product. The services PMI jumped to 53.6 in August from 51.8 in July, also a 12-month high.
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Manufacturing output sank at a faster pace over the month as the sector’s PMI reading went down to 47.3 from 48 over the same period. Factories reported the largest drop in new orders since April amid sluggish demand caused by President Trump’s tariffs.
The pound strengthened by 0.14 per cent against the dollar to buy $1.34 after the PMI was released. The FTSE 100 dropped by 0.18 per cent.
The S&P Global figures indicated that the UK economy’s growth momentum picked up over the summer after data from the Office for National Statistics (ONS) revealed that GDP expanded by 0.3 per cent in the three months to June. The economy also grew by 0.7 per cent in the first quarter of the year.
A string of poor data has underscored the challenging economic conditions facing the chancellor as she prepares the autumn budget. The ONS said this week that inflation jumped to 3.8 per cent in July, the highest level since January last year and up from 3.6 per cent.
The Bank of England has warned that it will reach 4 per cent in September, with food inflation on track to peak at 5.5 per cent, partly driven by supermarkets passing on the £25 billion rise in employers’ national insurance contributions (NICs). The Bank cut rates to 4 per cent this month.
S&P Global said that employment across the private sector continued to decline at an “aggressive” pace, which was attributed to rising costs stemming from the NICs rise and the 6.7 per cent increase to the minimum wage in April.
Since the NICs rise was announced by Reeves at the October budget, the PMI has consistently flagged that the labour market was undergoing its worst recession since the global financial crisis.
Government data suggests a sustained drop in payroll staff though some analysts question warnings about its effect
KELVIN JAY/GETTY IMAGES
Chris Williamson, chief business economist at S&P Global Market Intelligence, said: “Payroll numbers also continue to be cut at an aggressive rate by historical standards as firms cite weak order books and concerns over rising staff costs due to the policies announced in the autumn budget.”
Analysts have cast doubt on the validity of these warnings. Bruna Skarica, an economist at Morgan Stanley, said that the market viewed these findings “simply taken as wrong” but noted that they did chime with government data that has signalled a sustained drop in payroll staff.
Separate data revealed that the eurozone private sector economy also picked up momentum in August, aided by a series of interest rate cuts by the European Central Bank over the past year.
The composite eurozone PMI jumped to 51.1 in August from 50.9 in July, the highest reading in 15 months.
Bert Colijn, an economist at ING, said: “The PMI paints a picture of an economy not suffering too much from the trade war at this point.”