British Business Activity Strengthens

By Andy Bruce

(Reuters) – British business activity accelerated this month, and cost pressures were the weakest in over three years, according to a Thursday survey that indicated growth momentum going into the second half of 2024.

Investors slightly reduced their bets on a Bank of England interest rate cut next month after the preliminary “flash” estimate of the UK S&P Global Composite Purchasing Managers’ Index (PMI) rose in August to 53.4 from 52.8. This figure, the highest since April, also surpassed the median forecast of 52.9 in a Reuters economist poll, contributing to positive economic indicators for the new government of Prime Minister Keir Starmer.

Following the release, the sterling soared to a more than one-year high against the dollar. S&P Global described the PMI data as consistent with the economy growing at a quarterly rate of 0.3%. While this growth rate indicates a slowdown from the first half of the year after a brief recession in 2023, it remains stronger than the typical rates observed in the last two years.

The survey painted a stronger picture of the British economy compared to Germany and France, both of which are experiencing sharp manufacturing downturns. Notably, France benefited from robust growth in its service sector due to the Olympic Games.

Economist Ashley Webb from consultancy Capital Economics commented, “Today’s release probably won’t be enough to trigger a back-to-back interest rate cut in September. But it lends support to our view that services inflation will continue to fade and rates will be reduced from 5.0% now to 4.5% by the year’s end.”

The Bank of England (BoE) lowered borrowing costs from a 16-year high of 5.25% earlier this month. However, Governor Andrew Bailey and other officials indicated that they may not opt for rapid further rate reductions. Following Thursday’s survey, investors assigned less than a 30% chance of a rate cut in September.

A Reuters poll, published Wednesday, suggested the BoE is likely to cut interest rates just once more this year, in November.

Cost pressures on businesses grew at their weakest rate since January 2021, and the PMI’s measure of business price increases also declined. Williamson remarked, “The latest survey data therefore help lower the bar for further interest rate cuts, although the still-elevated nature of inflation in the service sector suggests that policymakers will move cautiously.”

The services PMI, which dominates Britain’s economy, climbed to its highest level since April at 53.3, up from 52.5 in July and above the 52.8 poll consensus. Meanwhile, the manufacturing PMI rose to 52.5 from 52.1, marking its highest level since June 2022, with the sector adding jobs at its fastest rate in over two years.

In contrast, a separate survey from the Confederation of British Industry indicated a gloomier outlook, as new orders contracted again in August, though at a slower pace than in July.