UK economic activity slows as rising interest rates hit spending

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UK economic activity slowed sharply in July as rising interest rates hit consumer spending and a manufacturing downturn deepened, a closely watched survey has shown.

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 output index hit a seven-month low of 46.5, indicating that a majority of businesses were reporting a contraction. This brought the composite index, which combines the two sectors, to a seven-month low of 50.7, down 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 (Cips), said the data showed the UK economy had “come close to stalling”.

“Rising interest rates and the higher cost of living appear to be taking an increased toll on households . . . Meanwhile, manufacturers are cutting production in response to a worryingly severe downturn in orders, both from domestic and export markets,” he said.

The survey was conducted against a backdrop of sharply rising UK mortgage rates, after stubbornly high readings for inflation and wage growth led 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 more encouraging data on inflation published last week, which has led some investors to scale back their expectations for the peak in interest rates.

The pound slipped to a two week low against the dollar, losing 0.2 per cent to trade at $1.283.

But John Glen, chief economist at Cips, said: “Higher borrowing costs are here to stay and the private sector knows it,” adding that the rise in interest rates was affecting both new orders and spending plans “long into the future”.

Thomas Pugh, economist at RSM UK, said the data suggested that “the economy is starting to buckle under the weight of the surge in interest rates and exceptionally high inflation”.

“The increase in interest rates delivered to date appears to be increasingly slowing the economy,” said Samuel Tombs, at the consultancy Pantheon Macroeconomics.

He added that the data bolstered the case for the BoE to stop raising interest rates soon, and to deliver only a 0.25 percentage point increase, rather than a 0.5 percentage point rise, next month.

Service sector companies responding to the survey said a weakening property market was hitting activity, and both businesses and consumers were cutting back on discretionary spending.

Manufacturers said a downturn in European markets was hitting demand for new orders. They bolstered their output partly by running down backlogs of work as previous blockages in supply chains eased and it became easier to hire staff who were previously in short supply.

There was also evidence of inflationary pressures easing. Companies answering the survey said both costs and selling prices were still rising, but at the slowest pace since early in 2021.

However, service sector companies were still managing to pass higher wage costs on to customers, a trend that will reinforce the BoE’s fears of a tight labour market fuelling persistent inflation.