The UK services sector, which accounts for approximately 80% of the country's economic output, experienced a deceleration in growth during September 2024, according to the latest S&P Global UK Services Purchasing Managers' Index (PMI). Despite the slowdown, the sector continued to expand, with the index registering 52.4, down from 53.7 in August.
One of the most notable aspects of the report was the cooling of inflationary pressures within the service sector. Prices charged by services firms increased at the slowest rate in nearly four years, a development likely to be welcomed by the Bank of England. This institution, founded in 1694 and serving as the UK's central bank, has been closely monitoring service sector prices as part of its efforts to assess inflationary pressures in the economy.
The Bank of England, which paused interest rate cuts in September 2024, is expected by investors to implement another rate cut in November. This expectation comes after the August 2024 rate reduction, as the central bank continues to navigate the complex economic landscape. The Bank's primary monetary policy tool, the Bank Rate, significantly influences interest rates throughout the economy.
Encouragingly, the survey revealed strength in order books, primarily from domestic clients, which has bolstered business expectations for the coming year. This positive outlook persists despite some hesitation among executives regarding key decisions ahead of the upcoming budget presentation by Rachel Reeves, the first woman to serve as Chancellor of the Exchequer in British history.
The budget, scheduled for October 30, 2024, is anticipated with a mix of optimism and concern. Rachel Reeves has indicated the possibility of tax increases to fund improvements in public services and investments aimed at accelerating economic growth. This fiscal event, also known as the Autumn Statement, typically occurs annually and plays a crucial role in shaping the UK's economic policy.
While the services sector showed resilience, the manufacturing sector, which contributes about 10% to the UK's economic output, displayed a more pessimistic outlook. Manufacturers expressed concerns about the impending budget, ongoing conflicts in the Middle East, and persistent inflationary pressures.
The composite PMI, which combines data from both the services and manufacturing sectors to provide a comprehensive economic overview, slipped to 52.6 in September from 53.8 in August. This decline reflects the broader challenges facing the UK economy, which ranks as the world's fifth-largest by nominal GDP.
As the UK continues its economic transition, which has been ongoing since the 1970s, from manufacturing to services, the performance of the service sector remains crucial. The country's financial services industry, centered in the City of London—one of the world's leading financial centers—plays a particularly significant role in this evolving economic landscape.
The Bank of England's Monetary Policy Committee, which convenes eight times annually to set monetary policy, will undoubtedly scrutinize these latest PMI figures. With the central bank's target inflation rate set at 2%, and considering the UK experienced inflation reaching a 40-year high of 11.1% in October 2022, the cooling of price pressures in the service sector may provide some relief.
As the UK navigates its post-Brexit economic journey, having officially left the European Union on January 31, 2020, the resilience and adaptability of its service sector will be crucial in addressing ongoing economic challenges and opportunities.