Rising interest rates will hit an already weak UK economy, production says

Interest rate hikes expected later this year will weaken a UK economy that is already growing at its slowest pace since it began to emerge from the 2021 lockdown, the latest snapshot of private sector activity suggests .

Although slightly better performing than the eurozone or the US, the latest monthly survey from the S&P Global/Chartered Institute of Procurement and Supply (Cips) showed that the UK services and manufacturing sectors were struggling to cope. to rising cost of living pressures.

Pressure on industry from rising commodity prices led to the first contraction in manufacturing output since the early stages of the pandemic in May 2020.

There were, however, signs in the survey of an ebb in global price pressures which contributed to the UK inflation rate of 9.4%, the highest in 40 years. Input cost prices eased for a second month and were at their lowest since September 2021.

Companies responding to the survey indicated that falling commodity prices, particularly metals, had started to have an impact, but companies in the service sector mainly said that the intense pressures due to the lack of personnel and rising consumer price inflation had continued to drive up their costs.

Even so, analysts said there was evidence a turning point had been reached. Samuel Tombs, the UK economist at consultancy Pantheon Macro, said the Bank of England would be encouraged by news of easing cost pressures and companies moderating the pace of price increases due to weak demand.

Bank Governor Andrew Bailey has said a half-point rise in borrowing costs is a possibility next month, but the S&P/Cips Purchasing Managers’ Index suggests Threadneedle Street will tighten its policy at a time when the economy is most vulnerable. in 17 months.

The survey showed service sector activity fell from 54.3 to 53.3 in June, while manufacturing fell from 50.3 to 49.7, while the composite production index fell from 53.7 in June to 52.8 in July. A reading below 50 suggests contraction rather than expansion.

Attempts to clear backlogs of orders meant employment continued to grow, but the survey showed the pace of new job creation was slowing.

Chris Williamson, chief economist at S&P Global Market Intelligence, said: “UK economic growth slowed in July, recording the slowest expansion since the lockdowns in early 2021.

“Although not yet in decline, with pent-up demand for consumer-oriented vehicles and services such as travel and tourism helping to support growth in July, the PMI is now at a constant level with growth GDP by just 0.2% Forward-looking indicators suggest that the worst is yet to come.

Separate PMIs indicated that the United States and the euro zone were already in recession. The US composite PMI fell from 52.3 to 47.5 in July, its lowest level in 26 months. The rate of decline in manufacturing and services has been the steepest since the start of the pandemic, due to falling demand.

Inflation currently stands at 9.1% in the United States and its central bank – the Federal Reserve – has raised interest rates in response. Official borrowing costs rose 0.75 percentage points last month and a similar sized jump is expected on Wednesday.

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Meanwhile, the eurozone composite index fell from 52.0 in June to 49.4 in July, with a slowdown in activity particularly evident in a drop from 51.3 to 48 in Germany, the most great economy of Europe. The French economy weakened but remained above the 50 threshold for recession.

The European Central Bank raised interest rates by 0.5 percentage points on Thursday, and there is now strong speculation that the Bank of England will announce a similarly sized increase on August 4. Williamson said there were risks.

“The problem is that rising interest rates as the Bank of England seeks to control inflation will further weaken demand growth in the months ahead. Raising interest rates at a time when business growth is as weak as it is in the last quarter century of the survey’s history,” he said.

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