According to a recent survey, British business activity has accelerated this month, with cost pressures being the weakest they have been in over three years. This signals positive growth momentum as the country heads into the second half of 2024. Investors have also reduced their expectations of a Bank of England interest rate cut next month, following the increase in the UK’s S&P Global Composite Purchasing Managers’ Index to 53.4 from 52.8 in August.
The higher reading in the UK’s Purchasing Managers’ Index has led to an increase in the value of the pound against the dollar, reaching a more than one-year high. The data suggests that the economy is expanding at a quarterly rate of 0.3 percent, which is stronger than the past two years but slower than the first half of the year. This positive economic outlook inherited by Prime Minister Keir Starmer’s new government has led to increased optimism in the market.
Economists believe that the recent survey results may not be sufficient to prompt an interest rate cut in September, but it does support the view that services inflation is likely to decrease, leading to a possible rate cut by the end of the year. While the Bank of England recently lowered borrowing costs from a 16-year high of 5.25 percent, further rapid reductions in rates may not follow suit according to Governor Andrew Bailey and other officials.
The survey indicates that cost pressures faced by businesses have increased at the slowest rate since 2021, with a decline in businesses’ price increases. This data lowers the bar for potential interest rate cuts, although cautiousness is advised due to remaining inflationary pressures in the service sector. The services sector, a dominant part of Britain’s economy, has shown an increase in its PMI to the highest level since April, signifying positive growth.
Improved growth has also been observed in the manufacturing sector, with the manufacturing PMI hitting its highest level since June. Factories have added jobs at the fastest pace in over two years, indicating a positive trend in the overall economy. However, a separate survey from the Confederation of British Industry paints a slightly gloomier picture, with new orders contracting in August, albeit at a slower pace than in July.
Overall, the recent survey results point towards a strengthening British economy, with increased business activity and reduced cost pressures. This positive momentum is supported by the strong performance of the services and manufacturing sectors, leading to cautious optimism in the market. While a further interest rate cut by the Bank of England is not imminent, the data suggests that policymakers will continue to monitor the situation closely before making any decisions.
