British business activity gained pace this month, with cost pressures easing to their lowest in over three years, according to a survey released on Thursday.
The data suggests solid growth momentum as the UK moves into the second half of 2024.
Following the release of the preliminary "flash" estimate of the UK S&P Global Composite Purchasing Managers' Index (PMI) for August, which rose to 53.4 from 52.8 in July, investors slightly reduced their expectations of a Bank of England (BoE) interest rate cut next month. This figure marked the highest level since April and surpassed the median forecast of 52.9 from a Reuters poll of economists, adding to the positive economic outlook inherited by the new government under Prime Minister Keir Starmer.
In response to the data, the British pound surged to its highest level against the dollar in over a year. According to S&P Global, the figures are consistent with the UK economy growing at a quarterly rate of 0.3%.
Although this growth rate represents a slowdown from the first half of the year, which followed a brief recession in 2023, it is still stronger than the typical pace seen over the past two years.
The survey portrayed a more robust picture of the UK economy compared to Germany and France, which are grappling with sharp downturns in manufacturing. However, France experienced stronger growth in its services sector, driven by preparations for the upcoming Olympic Games.
"Today's data likely won't be sufficient to prompt another back-to-back interest rate cut in September," said Ashley Webb, an economist at Capital Economics. "However, it supports our view that inflation in the services sector will continue to decline, leading to a reduction in rates from 5.0% now to 4.5% by the end of the year."
Earlier this month, the BoE cut borrowing costs from a 16-year high of 5.25%. However, Governor Andrew Bailey and other top officials have indicated they may not follow this with rapid further rate reductions. Following Thursday's survey, investors saw less than a 30% chance of a rate cut in September.
A Reuters poll of economists, published on Wednesday, suggested that the BoE would likely make only one more interest rate cut this year, expected in November.
Business cost pressures rose at the slowest rate since January 2021, and the PMI's measure of price increases by businesses also declined.
"The latest survey data lower the threshold for further interest rate cuts," said Chris Williamson, Chief Business Economist at S&P Global. "However, the still-elevated inflation in the services sector suggests that policymakers will proceed cautiously."
The PMI for the services sector, which is the largest part of the UK economy, rose to 53.3 in August, up from 52.5 in July and exceeding the poll consensus of 52.8.
Manufacturing also showed signs of improvement, with the manufacturing PMI increasing to 52.5 from 52.1, its highest level since June 2022. The sector added jobs at the fastest rate in over two years.
In contrast, a separate survey from the Confederation of British Industry (CBI) presented a more pessimistic view, reporting that new orders contracted again in August, though at a slower pace than in July. Photo by Joe D, Wikimedia commons.