Reinforced by the highest increase in new business since April 2023 and improved business confidence, UK private-sector business activity accelerated in July (according to the latest S&P Global UK Purchasing Managers Index [PMI]). This suggests that robust economic activity this year could continue. The latest UK Gross Domestic Product (GDP) showed that the economy expanded by +0.7% in Q1.

Manufacturing Activity Clocks Two-Year High

The S&P Global Flash Manufacturing PMI rose to 51.8 in July from 50.9 in June, surpassing the market’s median estimate of 51.1. The Services PMI increased to 52.4 from 52.1, though it fell short of the market’s median forecast of 52.5. The Composite Output PMI, calculated by weighting together comparable manufacturing and services indices, rose to 52.7 from 52.3 (though slightly below the market’s median estimate of 52.6).

This follows an earlier PMI report for the eurozone, which revealed the HCOB Composite Flash PMI fell within striking distance of the 50.0 threshold to 50.1 in July from 50.9 in June. It is important to remember that a release above 50.0 indicates economic expansion, while one below 50.0 points to contraction.

UK activity in the manufacturing sector fared well, reaching a two-year high and recording the sharpest acceleration of the three measures on the back of production levels rising for a third consecutive month. The PMI report added: ‘Companies mainly increased output due to stronger order book volumes, whilst also maintaining efforts to reduce outstanding workloads’. In the services sector, which accounts for much of the UK GDP, activity rose less than expected.

In terms of prices, the report communicated: ‘A rise in transport prices contributed to a marked increase in total input costs at manufacturers in July, with the uplift being the sharpest recorded in one-and-a-half years. However, with services cost inflation easing fractionally to a 41-month low, input cost inflation in the UK private sector was among the softest observed since the beginning of 2021’.

Chief Business Economist at S&P Global Market Intelligence, Chris Williamson, commented: ‘The first post-election business survey paints a welcoming picture for the new government, with companies operating across manufacturing and services having gained optimism about the future, reporting a renewed surge in demand and taking on staff in greater numbers. Prices have meanwhile risen at their lowest rate for three and a half years, further raising the prospect of a summer rate cut’.

Market Reaction

Following the release, sterling (GBP) rallied versus the US dollar (USD), along with UK bonds falling (sending yields north). The Bank of England (BoE) will meet on 1 August. Given elevated services inflation running above the BoE’s forecast, persistent core inflation (excludes energy and food components) and substantial wage growth, coupled with increased economic activity, markets are pricing in a 45% chance (6 basis points of cuts priced in) that the BoE will reduce its Bank Rate by 25 basis points, with September still very much on the table (21 basis points of easing). Alongside the accompanying rate statement, investors will receive updated forecasts for inflation and growth. Although a rate reduction may not come to fruition in August, we could see a shift in policy voting; you will recall the June meeting was a 7-2 vote in favour of a hold, though the BoE’s minutes noted the decision was finely balanced between doves and hawks.

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