UK private sector firms suffer first contraction in seven months, PMI figures show

Companies blame soaring interest rates in Bank of England's battle to contain inflation

The UK's manufacturing PMI fell from 45.3 to 42.5 in August, its lowest since May 2020. PA

Private sector companies in the UK have suffered their first contraction in seven months, as 14 consecutive interest rate increases take their toll on demand.

Figures from S&P Global show its composite Purchasing Managers’ Index (PMI) fell to 47.9 in August from 50.8 the month before, the lowest score in 31 months.

Scores above 50 denote expansion, while those below 50 point to contraction.

Economists had expected a slight drop, but had mostly forecast a score above 50.

The manufacturing PMI fell from 45.3 to 42.5 in August, its lowest since May 2020, while the services sector fell from 51.5 to 48.7, which was equal to the two-year low it hit in January this year.

Both manufacturing and service sector companies said the drop in their numbers was caused by the relentless upward march of UK interest rates. After 14 consecutive rises by the Bank of England, interest rates are now at 5.25 per cent and are predicted to peak at 6 per cent early next year.

Economic contraction

Analysts believe the PMI numbers point to a 0.2 per cent decline in gross domestic product so far in third quarter, meaning that the case for the Bank of England to pause its rate-rising strategy is strengthened.

“A renewed contraction of the economy already looks inevitable, as an increasingly severe manufacturing downturn is accompanied by a further faltering of the service sector’s spring revival,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.

“While a further hike in interest rates in September looks to be on the cards, the August PMI data will add to speculation that rates could soon peak.”

So far this year, the resilience of the UK's service sector has offset the slump in manufacturing, but the August PMI numbers show that both sectors are now contracting.

S&P also said the prices firms charge for their products and services rose at the slowest rates since February 2021.

“Companies are reporting reduced orders for goods and services as demand is increasingly hit by the cost-of-living crisis, higher interest rates, export losses and concerns about the economic outlook,” Mr Williamson said.