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UK economic activity fell unexpectedly in August for the first time since the start of the year as higher interest rates hit demand, according to a closely watched survey.
The flash UK composite purchasing managers’ index, a measure of the health of the economy, was 47.9 in August, down from 50.8 in July and below the neutral 50 threshold for the first time since January, according to data published on Wednesday.
A reading below 50 indicates a majority of businesses reporting a contraction, and August’s figure was well below the 50.3 forecast by economists in a Reuters poll.
Chris Williamson, chief business economist at S&P Global Market Intelligence, which publishes the survey, said a renewed economic contraction “already looks inevitable, as an increasingly severe manufacturing downturn is accompanied by a further faltering of the service sector’s spring revival”.
He calculated that the survey was indicative of gross domestic product declining by 0.2 per cent over the third quarter so far.
Wednesday’s figures will be scrutinised by BoE policymakers as they decide next month whether to lift interest rates for the 15th consecutive time since December 2021. The central bank’s benchmark rate now stands at 5.25 per cent, a 15-year high.
Paul Dales, economist at the consultancy Capital Economics, said the data would encourage the BoE “that higher rates are working” and that GDP would soon contract, triggering “a mild recession”.
Martin Beck, chief economic adviser to the EY ITEM Club, a consultancy, said the findings “may not be enough to deter the Bank of England from raising interest rates again, given recent developments in pay and services inflation”.
However, he said the data reinforced his impression “that a rate rise next month, if it happens, will likely be the last in the current cycle”.
The figures follow recent more resilient economic data, including better than expected statistics for public borrowing and growth in the second quarter.
Companies responding to the PMI survey reported a fall in orders for goods and services as the cost of living crisis, higher borrowing costs, export losses and concerns about the economic outlook hit demand.
Activity in the services sector contracted for the first time since January, with the lowest output reading in 31 months. The downturn in the manufacturing sector accelerated, marking the sixth consecutive month of falling output.
The survey, based on interviews carried out between 10 August and 21 August, reported that input costs rose at the slowest pace for two-and-a-half years, while average prices charged by private sector companies increased at the lowest rate since February 2021.
John Glen, CIPS chief economist, said higher interest rates were “starting to have their intended effect of dampening demand and reducing inflationary pressures, leading to moderated input costs and reduced raw material prices for manufacturers”.
Weaker demand will be welcomed by BoE rate-setters after official data showed regular wages rising at the fastest pace on record in the three months to June, which suggested persistently high underlying price pressure.
Dales said “the dual signs of weaker activity and easing price pressures” strengthened his view that interest rates would “peak around 5.5 per cent rather than the 6 per cent priced into the markets before this release”.
Jobs growth eased between July and August, with employment expanding at the slowest pace since March, but survey respondents pointed to continuing difficulties in recruiting and retaining suitably skilled staff.
Faltering activity in the UK was mirrored in the eurozone, where the composite PMI index fell to a 33-month low of 47.
