UK economic activity slows as rising interest rates hit spending

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Britain’s economic activity slowed sharply in July as rising interest rates hit consumer spending and the slowdown in manufacturing deepened, according to a closely watched survey.

The UK services production flash PMI, a measure of activity in the sector, fell to a six-month low of 51.3, new data showed on Monday.

Meanwhile, the manufacturing production index hit a seven-month low of 46.5, indicating that a majority of companies were signaling a contraction. That took the composite index, which combines the two sectors, to a seven-month low of 50.7, from 52.8 in June.

Chris Williamson, chief economist at S&P Global Market Intelligence, which publishes the index with the Chartered Institute for Procurement and Supply (Cips), said the data showed the UK economy had “almost stalled”.

“The rise in interest rates and the increase in the cost of living seem to weigh more and more heavily on households. . . Meanwhile, manufacturers are cutting production in response to a worrying drop in orders, both in domestic and export markets,” he said.

The survey came amid a sharp rise in UK mortgage rates, after stubbornly high readings for inflation and wage growth led the Bank of England to raise its benchmark rate to a 15-year high of 5% in June.

The survey did not fully reflect more encouraging inflation data released last week, leading some investors to lower their expectations for peak interest rates.

But John Glen, chief economist at Cips, said: “Higher borrowing costs are here to stay and the private sector knows it,” adding that rising interest rates were affecting both new orders and “long-term” spending plans.

Thomas Pugh, economist at RSM UK, said the data suggested the “economy is beginning to collapse under the weight of soaring interest rates and exceptionally high inflation”.

“The interest rate hikes announced to date seem to be slowing the economy down more and more,” said Samuel Tombs of the consultancy Pantheon Macroeconomics.

He added that the data strengthened the case for the BoE to stop raising interest rates soon and only grant a 0.25 percentage point hike, rather than a 0.5 percentage point hike, next month.

Service-sector companies responding to the survey said a weak real estate market was hitting activity and businesses and consumers were cutting discretionary spending.

Manufacturers said a slowdown in European markets was hitting demand for new orders. They have boosted production in part by reducing backlogs as earlier bottlenecks in supply chains have eased and it has become easier to hire staff who were previously in short supply.

There were also signs of easing inflationary pressures. Companies responding to the survey said costs and selling prices continued to rise, but at the slowest rate since the start of 2021.

However, companies in the services sector were still managing to pass on rising labor costs to customers, a trend that will reinforce BoE fears of a tight labor market fueling persistent inflation.