UK economic activity slows as rising interest rates hit spending

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Britain’s economic activity slowed sharply in July as rising interest rates hit consumer spending and a manufacturing slump deepened, a closely watched survey showed.

The flash UK PMI Services Output Index, a measure of activity in the sector, fell to a six-month low of 51.3, according to new data released on Monday.

Meanwhile the manufacturing production index hit a seven-month low of 46.5, indicating most businesses were reporting contraction. This pushed the Composite Index, which combines the two sectors, to a seven-month low of 50.7 from 52.8 in June.

Chris Williamson, chief business economist at S&P Global Market Intelligence, which publishes the index with the Chartered Institute for Procurement and Supply (Sips), said the data showed the UK economy “has come to a near standstill”.

“Rising interest rates and the higher cost of living seem to be taking a bigger toll on families. , , Meanwhile, manufacturers are cutting production due to a worryingly steep fall in orders from both the domestic and export markets.

The survey was conducted against a backdrop of sharply rising mortgage rates in the UK, after extremely high readings for inflation and wage growth prompted the Bank of England to raise its benchmark rate to a 15-year high of 5 per cent in June.

The survey did not fully reflect the more encouraging data on inflation published last week, which has led some investors to lower their expectations of a peak in interest rates.

But John Glenn, chief economist at SIPS, said: “High borrowing costs are here to stay and the private sector knows it,” adding that rising interest rates are affecting both new orders and plans to spend “long into the future”.

RSM UK economist Thomas Pugh said the data showed “the economy is beginning to falter under the burden of rising interest rates and exceptionally high inflation”.

“The economy continues to slow with interest rate hikes delivered so far,” said Samuel Tombs at consultancy Pantheon Macroeconomics.

He said the data strengthened the case for the BoE to hold off on raising interest rates too soon and to deliver only a 0.25 percentage point hike next month instead of 0.5 percentage point.

Companies in the services sector responded to the survey saying a weak property market was affecting activity, and both businesses and consumers were cutting back on discretionary spending.

Manufacturers said a slowdown in European markets is affecting demand for fresh orders. They increased their production partly by reducing the backlog of work because previous bottlenecks in supply chains were reduced and it became easier to hire workers who were previously in short supply.

There was also evidence of easing inflationary pressures. Companies who answered the survey said both costs and selling prices are still rising, but at the slowest pace since the beginning of 2021.

However, service sector companies still managed to pass on higher wage costs to customers, a trend that will strengthen the BOE’s fears of a tight labor market continuing to fuel inflation.