UK economic activity slows as rising interest rates hit spending

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UK financial exercise slowed sharply in July as rising rates of interest hit client spending and a producing downturn deepened, a carefully watched survey has proven.

The flash UK PMI providers output index, a measure of exercise within the sector, fell to a six-month low of 51.3, in response to new information launched on Monday.

In the meantime the manufacturing output index hit a seven-month low of 46.5, indicating {that a} majority of companies have been reporting a contraction. This introduced the composite index, which mixes the 2 sectors, to a seven-month low of fifty.7, down from 52.8 in June.

Chris Williamson, chief enterprise economist at S&P International Market Intelligence, which publishes the index with the Chartered Institute for Procurement and Provide (Cips), stated the info confirmed the UK financial system had “come near stalling”.

“Rising rates of interest and the upper value of dwelling seem like taking an elevated toll on households . . . In the meantime, producers are chopping manufacturing in response to a worryingly extreme downturn in orders, each from home and export markets,” he stated.

Equally, the HCOB flash eurozone composite PMI fell to an eight-month low after a sharper than anticipated slowdown in providers and a steeper decline in manufacturing in July.

The UK survey was carried out towards a backdrop of sharply rising mortgage charges, after stubbornly excessive readings for inflation and wage progress led the Financial institution of England to lift its benchmark charge to a 15-year excessive of 5 per cent in June.

The survey didn’t totally replicate extra encouraging information on UK inflation revealed final week, which has led some traders to reduce their expectations for the height in rates of interest.

The pound slipped to a two week low towards the greenback, shedding 0.3 per cent to commerce at $1.282.

However John Glen, chief economist at Cips, stated: “Larger borrowing prices are right here to remain and the personal sector is aware of it,” including that the rise in rates of interest was affecting each new orders and spending plans “lengthy into the long run”.

Thomas Pugh, economist at RSM UK, stated the info recommended that “the financial system is beginning to buckle underneath the load of the surge in rates of interest and exceptionally excessive inflation”.

“The rise in rates of interest delivered up to now seems to be more and more slowing the financial system,” stated Samuel Tombs, on the consultancy Pantheon Macroeconomics.

He added that the info bolstered the case for the BoE to cease elevating rates of interest quickly, and to ship solely a 0.25 proportion level improve, moderately than a 0.5 proportion level rise, subsequent month.

Service sector firms responding to the survey stated a weakening property market was hitting exercise, and each companies and shoppers have been chopping again on discretionary spending.

Producers stated a downturn in European markets was hitting demand for brand spanking new orders. They bolstered their output partly by working down backlogs of labor as earlier blockages in provide chains eased and it turned simpler to rent employees who have been beforehand briefly provide.

There was additionally proof of inflationary pressures easing. Firms answering the survey stated each prices and promoting costs have been nonetheless rising, however on the slowest tempo since early in 2021.

Nonetheless, service sector firms have been nonetheless managing to cross greater wage prices on to prospects, a development that can reinforce the BoE’s fears of a decent labour market fuelling persistent inflation. 

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