UK service sector growth speeds up as inflation drops to lowest since 2021

Growth in the UK’s services sector picked up pace last month as businesses felt the benefits of falling borrowing costs and post-election political stability, according to a new survey.

Some firms said their customers were more willing to spend after noticing a lull in decision-making earlier in the summer.

The S&P Global UK services PMI survey scored 53.7 in August, up from the 52.5 recorded July and the highest reading since April.

The headline score, which is watched closely by economists, central banks and financial markets, came in marginally ahead of economists’ predictions.

It remained above the 50.0 threshold for the tenth month in a row, which means that activity in the sector is still growing.

The PMI survey found that improving economic conditions had led to more spending, while the prospect of falling borrowing costs helped lift business and consumer sentiment.

Tim Moore, economics director at S&P Global Market Intelligence, said “domestic political stability helped to bolster customer demand”, after the July general election which saw a landslide Labour victory.

Furthermore, businesses hired more staff in August as they took on more work and put in place expansion plans.

“The modest post-election bounce in business activity expectations faded, however, in August,” Mr Moore went on.

“Hopes of interest rate cuts and steady improvements in broader economic conditions helped to support confidence, but some firms cited concerns about policy uncertainty in the run up to the autumn Budget.”

The PMI survey incorporates the responses of hundreds of companies across the UK’s services sector, which includes hospitality, entertainment and culture, finance and insurance, and real estate and business services.

The overall rate of input cost inflation slowed to its lowest level since January 2021, the report showed, releasing some pressure on businesses who have faced bigger expenses.

Nevertheless, paying higher wages for staff continued to be a major cost burden for businesses in August, as well as greater shipping costs.

Inflation in the services sector has been a crucial measure watched by the Bank of England, which cut interest rates in August for the first time since 2020.

Rob Wood, chief UK economist for Pantheon Macroeconomics, said August’s data is “strong enough for the MPC (Monetary Policy Committee) to wait until November to cut interest rates again”.

But he said policymakers “will take considerable comfort from the PMI showing continued gradual declines in inflation pressure”.

Peter Arnold, UK chief economist for EY, agreed that cooling inflation will be “welcomed” by the MPC, but said the data “doesn’t meaningfully shift the dial towards a faster pace of cuts”.

He also expects rates to be held at 5% at the next meeting later this month.