Sterling Rises As UK Business Activity Surges Beyond Expectations

The UK’s private sector experienced a stronger-than-expected growth in August, marking the fastest expansion in four months. This boost has driven the pound to a 13-month high against the dollar, signalling robust economic performance during the summer.

According to the latest data from S&P Global, the Flash UK PMI composite output index, which measures the performance of the manufacturing and services sectors, climbed to 53.4 in August from 52.8 in July. This uptick was partly due to easing price pressures. The figure, the highest since April, outstripped the 52.9 forecast by economists in a Reuters poll, prompting a 0.2% rise in sterling to $1.3122, its strongest level since July 2023.

A PMI reading above 50 indicates growth in business activity compared to the previous month. The pound’s gain also means a 2% rise against the dollar for the month.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, described August as a month of “stronger economic growth, improved job creation, and lower inflation.” The data suggests that the UK economy could expand at a “reasonably solid” rate of about 0.3% in the third quarter, he added.

Official figures support this optimistic outlook, showing that the UK’s GDP rebounded strongly from last year’s recession. The economy grew by 0.7% in the first quarter and 0.6% in the second quarter of 2024.

The survey also revealed that input costs for businesses rose at the slowest pace since January 2021, and inflationary pressures eased significantly in the services sector. This is a positive sign for the Bank of England, which has been concerned about inflation in this part of the economy. Last week’s official data showed services price growth slowing from 5.7% in June to 5.2% in July, with headline inflation steady at 2.2%, close to the central bank’s 2% target.

Ashley Webb, an economist at Capital Economics, noted that while the S&P data is unlikely to prompt an immediate interest rate cut in September, it does suggest that “services inflation will continue to fade,” with rates potentially dropping from 5% to 4.5% by year-end. The Bank of England made its first rate cut in over four years in August, lowering the benchmark rate by 0.25 percentage points. Financial markets currently predict a 70% chance that the central bank will hold rates steady in its next meeting.

Both the manufacturing and services sectors posted solid gains, with the services PMI rising to 53.3 in August from 52.5 in July—a four-month high. The manufacturing PMI also improved, reaching a 26-month high of 52.5 from 52.1 in July.

Businesses reported increased sales, particularly within the UK, attributing this to softer price pressures, lower borrowing costs, and a more optimistic economic outlook. Job creation also surged, hitting its fastest pace in 14 months, supported by increased staffing in both sectors. This growth in employment was underpinned by a more optimistic sentiment about the near-term business environment.

The UK’s composite PMI reading of 53.4 in August was notably higher than the eurozone’s 51.2, despite the latter reaching a three-month high. The UK economy outpaced the eurozone in the first half of 2024, with 0.3% growth in both the first and second quarters.

Salomon Fiedler, an economist at Berenberg bank, remarked, “The UK remains a bright spot in Europe this year,” highlighting the country’s economic resilience amid broader challenges.