UK private sector growth reaches four-month high as services offset factory slowdown

The flash S&P Global composite purchasing managers’ index rose to 52.5 in August from 52.2 in July, according to data reported by Reuters via Investing.com. Readings above 50 indicate expansion. Services improved to 52.8 from 52.1, while manufacturing output slowed to 51.2 from 52.9. The numbers suggest the economy retained momentum in the middle of the third quarter, but the detail is less comfortable for employment and business costs.

At a glance

• Investing.com/Reuters: S&P Global’s flash composite PMI rose to 52.5 in August from 52.2 in July.
• Investing.com/Reuters: The services business activity index increased to 52.8 from 52.1, a six-month high.
• S&P Global data reported by market outlets: the manufacturing output index eased to 51.2 from 52.9, while the separate headline manufacturing PMI was 51.5.
• S&P Global reporting: aggregate new orders rose at the strongest pace since February, led by services.
• S&P Global commentary: staffing continued to fall as firms cited high labour costs, including the impact of National Insurance changes.

Services are doing the heavy lifting

The improvement is mainly a services story. Consumer-facing activity benefited from better domestic conditions, while technology investment and steadier client confidence also supported demand. Because services make up most of the UK economy, a modest acceleration there can outweigh a softer month for manufacturers. Reuters reported that the services index beat expectations, which helps explain why the composite reading surprised on the upside even though factory momentum weakened.

Manufacturing is still growing, just more slowly

The distinction between the manufacturing output index and the headline manufacturing PMI is important. S&P Global’s flash data put output at 51.2, down from 52.9, while the broader manufacturing PMI was reported at 51.5. Both are above 50, so the sector was not in outright contraction. The problem is direction: precautionary stock-building that had supported factories earlier in the summer appears to be fading, leaving producers more exposed to underlying demand and higher input costs.

Orders offer the more encouraging signal

Across services and manufacturing together, new orders rose at the strongest rate since February. That matters because output can sometimes rise temporarily as companies work through old backlogs or inventories. Fresh orders are a better guide to whether activity has enough demand behind it to continue. The improvement was led by services, suggesting that domestic spending and business-to-business demand are currently more important to the growth picture than export-led manufacturing.

The jobs picture remains stubbornly weak

Employment has not followed output higher. Survey evidence continues to show companies trimming headcount, extending a long run of monthly staffing declines. Businesses have repeatedly linked that caution to weak demand in some sectors and to higher labour costs, including the increase in employer National Insurance contributions. That creates an unusual combination: activity is expanding, but managers are trying to meet demand without adding many workers. Productivity gains would make that sustainable; simple cost-cutting would not.

Inflation pressure has not disappeared

Input costs rose sharply, with fuel, transport and wages among the pressures cited by respondents. That will matter to the Bank of England because stronger growth is easier to welcome when it comes with easing price pressure. If companies respond to rising costs by increasing selling prices, the room for interest-rate relief narrows. For now, the survey points to resilience rather than a boom: enough growth to reduce recession fears, but not enough labour-market strength to suggest a broad acceleration.

What happens next

The final August PMI readings are due in early September and can revise the flash estimates. Markets will also compare them with official GDP, wage and inflation data. The question for the autumn is whether stronger services demand turns into hiring and investment, or whether firms continue to expand output while holding staffing levels down to protect margins.