Sterling rises after UK business activity rises more than expected

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UK private sector activity grew more than expected in August and at the fastest pace in four months, sending sterling to a 13-month high against the dollar and pointing to solid economic growth in the summer.

The S&P Global Flash UK PMI composite manufacturing index, a measure of the health of the manufacturing and services sectors, rose to 53.4 in August from 52.8 in July, helped by easing price pressures.

The reading was the highest since April and above the forecast of 52.9 economists in a Reuters poll, sending sterling up 0.2 percent to $1.3122, its highest point since July 2023.

A reading above 50 indicates that most companies are reporting an expansion from the previous month, and the pound’s rise brought total gains against the dollar this month to 2%.

Chris Williamson, chief business economist at S&P Global Market Intelligence, said August “saw a welcome combination of stronger economic growth, improved job creation and lower inflation.”

The figures point to easing inflationary pressures in the private sector and suggest the UK economy will expand at a “reasonably solid” rate of around 0.3% in the third quarter, he added.

GDP growth rebounded strongly from last year’s recession, according to separate official data, reaching 0.7 percent in the first quarter of this year and 0.6 percent in the second.

In addition to reporting that input costs rose at the slowest pace since January 2021 in August, the survey showed that inflationary pressures moderated sharply in the services sector – an area of ​​concern for the Bank of England.

Official inflation data last week showed service price growth fell sharply from 5.7 percent in June to 5.2 percent in July, with headline inflation of 2.2 percent remaining close to the central bank’s 2 percent target.

Ashley Webb, economist at research firm Capital Economics, said the S&P statement “probably won’t be enough to trigger a consecutive rate cut in September,” but suggested that “services inflation will continue to decline and rates will be reduced from 5% now to 4.5% by the end of this year”.

The BoE cut its benchmark rate by 0.25 percentage points in August, the first cut in more than four years. Financial markets are pricing in a 70 percent chance the central bank will keep rates on hold at its next meeting in September.

Both manufacturing and services saw solid growth, with the services PMI rising to a 4-month high of 53.3 in August from 52.5 in July. The same manufacturing index rose to a 26-month high of 52.5 this month, from 52.1 in July.

Companies reported an improvement in sales, particularly in the UK market, linked to lighter pricing pressures and lower borrowing costs, alongside hopes of a sustained recovery in UK economic conditions.

Job creation hit the fastest pace in 14 months, with more hiring in both sectors. The recovery in employment growth was spurred by a more upbeat sentiment about the near-term business outlook.

Britain’s composite reading of 53.4 in August was well above the euro zone’s 51.2, although it marked a three-month high. The UK economy outperformed the euro zone in the first half of 2024, growing by 0.3% in both the first and second quarters.

“The UK remains a bright spot in Europe this year,” said Salomon Fiedler, economist at Berenberg Bank.