UK economy stumbles but price pressures remain high: flash PMI

LONDON (Reuters): Britain’s economy showed signs of a slowdown this month but inflation pressures stayed high, according to a survey published a day after the Bank of England raised interest rates sharply and said it was ready to do more to tame price growth.

S&P Global’s Composite Purchasing Managers’ Index (PMI) – covering businesses in the services and manufacturing sectors – dropped to a three-month low of 52.8 in June, a preliminary reading showed on Friday, down from 54.0 in May and hit by the weakest growth in new orders since January as factories suffered.

Chris Williamson, chief business economist at S&P Global Market Intelligence, said the survey suggested the economy had lost momentum after a brief growth spurt in the spring and looked set to weaken further in the months ahead.

“Most notably, consumer spending on services, which was a core growth driver in the spring, is now showing signs of faltering,” he said, blaming higher interest rates, strong inflation and worries about the outlook.

The preliminary or ‘flash’ survey showed Britain’s services sector grew at its slowest pace in three months while the manufacturing sector contracted by the most in six months.

One exception to the downturn was the strongest growth in hiring since September last year, generating higher wage growth and feeding into the inflation pressures in the service sector which are a particular worry for the BoE.

The BoE is expected to continue raising borrowing costs as it tries to tackle inflation which held at 8.7% in May.

“However, such rate hikes will clearly add further to the likelihood of a recession later in the year, which is looking increasingly inevitable as collateral damage in the fight against inflation,” Williamson said.

The BoE on Thursday raised interest rates for the 13th time in a row, taking Bank Rate to 5.0%, up sharply from 0.1% at the end of 2021.

The PMI survey showed services firms increased their prices sharply once again this month although a bit less steeply than in May. By contrast, manufacturers cut the prices they charged for the first time in more than seven years.

Companies across the manufacturing and services sectors turned a bit less optimistic about their prospects over the next 12 months, with the degree of confidence about future output falling back to its lowest since January.