Higher borrowing costs 'here to stay' as UK private sector growth cools
The latest closely watched purchasing managers’ index (PMI), compiled by the Chartered Institute of Procurement and Supply (Cips) and S&P Global, shows that while the private sector economy is still growing, it has lost some of its momentum compared to previous months. An index reading of 50.7 for July is down sharply from 52.8 in June and marks the weakest result in six months.
Although the figures indicate that the economy is still growing, with anything over 50 being positive, it is a sharp slowdown and worse than the 52.3 that experts had forecast. The companies which filled out the survey said that they had been hit by rising interest rates, still high levels of inflation and caution among customers. It dampened the post-pandemic rebound in what households spend on leisure activities, the survey found.
Chris Williamson, chief business economist at S&P Global Market Intelligence, said: “The UK economy has come close to stalling in July which, combined with gloomy forward-looking indicators, reignites recession worries. July’s flash PMI survey data revealed a deepening manufacturing downturn accompanied by a further cooling of the recent resurgence of growth in the service sector.”
John Glen, chief economist at Cips, said: “Higher borrowing costs are here to stay and the private sector knows it. Interest rate hikes are not just affecting new orders today but spending plans long into the future. The biggest concern is increasingly not if the UK economy will enter recession but for how long.”
Thomas Pugh, an economist at audit, accounting and business services giant RSM UK, noted: “The fall in the flash PMI to 50.7 in July, combined with the drop in the GfK measure of consumer confidence, suggests that the economy is starting to buckle under the weight of the surge in interest rates and exceptionally high inflation. We think a [quarter-point] rise in interest rates at the next [Bank of England] meeting on August 3 is the most likely outcome, but there is a roughly 33 per cent chance that the [Bank] goes for another bumper [half-point] rise to try to quash signs of sticky inflation in the services sector.”
There was some good news among the bad in the latest PMI snapshot. Manufacturers reported that the time it took their suppliers to deliver goods dropped at the fastest rate since January 1992 when records began. It marks a normalisation in supply chains that brought down cost pressures for companies, and allowed them to reduce what they charged customers.
“The jigsaw pieces for a supply-led reduction in inflation are falling into place,” Glen said. “Global supply chains are returning to normal after years of pandemic shortages and rising costs. Stocks of unused goods built up to help manage Brexit, the pandemic and most recently global shipping disruption are finally being run down. Manufacturing input costs are falling and supplier performance is improving at the fastest rate we have ever seen.”
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