Growth slowdown and cooling prices could ease rate hike pressure

Britain’s businesses grew at their slowest pace in 17 months in July but inflation pressures eased, according to an industry survey.

Slowing growth and softening price pressures could see the Bank of England  reassess the recently touted option of delivering a bigger interest rate hike next month, experts have said.

The preliminary version of the S&P Global’s Purchasing Managers’ Index (PMI), covering services and manufacturing firms, fell to 52.8 – the lowest since February 2021 – from June’s 53.7. 

Britain’s businesses grew at their slowest pace in 17 months in July and inflation pressures eased, according to an industry survey 

The survey of UK business showed a slowdown in output growth driven by ‘softer demand’.

As a result, the manufacturing sector saw activity decline for the first month since May 2020 as goods producers blamed a lack of new work to replace completed orders.

Nevertheless, the services sector continued to outperform other areas of industry, although its own growth slowed slightly.

Firms revealed that cost inflation eased for the second consecutive month to bring monthly cost rises to a 10-month low, with the easing particularly notable among manufacturing firms.

The fall was due to weaker commodity prices and a stabilisation in fuel costs, although many firms reported intense salary pressures and some said the pound’s fall against the US dollar was also hurting them. 

As a result, there was also a slowdown in increases to the prices charged by companies to their customers.

The Bank of England has said it is ready to raise interest rates by a half-percentage point in August if it sees signs of persistent inflation pressures. 

But data from Refinitiv shows that investors have already pared back their bets on a 50 basis-point rate hike by the BoE on 4 August, from nearly 100 per cent earlier in the week to around 68 per cent. 

Companies remained cautious about the outlook although their mood improved from June’s 25-month low, driven by service firms. Employment rose at the slowest pace in 16 months 

Firms revealed that cost inflation eased for the second consecutive month to bring monthly cost rises to a 10-month low, with the easing particularly notable among manufacturing firms

Chris Williamson, chief business economist at S&P Global Market, said the reading was consistent with quarterly economic growth of 0.2 per cent and there were signs from order books that the slowdown would worsen. 

‘The concern is that rising interest rates, as the Bank of England seeks to control inflation, will cause demand growth to weaken further in the coming months,’ Williamson said. 

‘To be hiking interest rates at a time of such weak business growth is unprecedented over the past quarter-century of survey history.’ 

Duncan Brock, group director at CIPS (Chartered Institute of Procurement & Supply), added: ‘Private sector firms left little to get excited about in July with the softest rise in activity since February 2021 but there was a scrap of improvement in some areas that offered light relief.

‘The rise in input costs was the lowest since September 2021 with a slight stabilisation in fuel costs and some commodity prices had started to drop.’

While the PMI suggested a slowdown in growth in Britain, parallel surveys for other European economies showed a contraction. Other data on Britain’s economy published on Friday showed consumers cut back on their shopping in June and consumer confidence remained at an all-time low. 

The contenders to succeed Boris Johnson as prime minister are split on how to revive the economy, with tax cuts the main dividing line in the campaign so far. 

This post first appeared on Dailymail.co.uk