Sheepish consumers deal blow to UK services economy

Consumers cutting spending in response to a historic inflation surge has weighed on growth in the UK’s services economy, reveals a closely watched survey published today.

Brits are being squeezed by soaring living costs eroding their incomes, prompting them to cut unnecessary spending to protect their finances.

As a result, growth in the services industry slid to a 17-month low of 52.6 last month, down from 54.3 in June, according S&P Global and the Chartered Institute of Procurement and Supply (CIPS)’s latest purchasing managers’ index (PMI).

“Reduced levels of discretionary consumer spending and efforts by businesses to contain expenses due to escalating inflation have combined to squeeze demand across the service economy,” Tim Moore, economics director at S&P Global Market Intelligence, said.

Prices in the UK have climbed 9.4 per cent overt the last year, the fastest acceleration since 1982. Wages have failed to keep pace with inflation, meaning households are being forced to prioritise non-discretionary spending, such as food and energy bills.

Forecasts yesterday from research firm Cornwall Insights projected average annual energy bills will peak at just over £3,700 next spring and stay there for several months, meaning Brits are facing a prolonged squeeze on their budgets.

The Bank of England is tomorrow expected to hike interest rates 50 basis points, which would  be the largest rise in its 25 years of independence. Consumer confidence has also tumbled to its lowest level since records began in the 1970s.

Despite the slow down, the PMI topped the 50 points threshold that separates growth from contraction.

But, analysts said the PMI does not capture the scale of the UK economy’s downturn.

“We think the economy has less momentum than implied by the PMIs, for three reasons. First, the PMIs exclude retail sales, which have been trending down, and public sector output, which will be slightly lower in [the third quarter] than in [the second quarter], due to the decline in Covid-related activities,” Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said.

“Second, the future activity index was much further below its long-run average than the current activity index, suggesting that the latter has further to fall,” he added.

“Third, the PMI has tended to overstate the rate of real GDP growth when CPI inflation has been high in the past, suggesting that some businesses say whether turnover was higher or lower than in the previous month, rather than output.”

The combined PMI, that measures all activity in the private sector, also dropped to a 17-month low of 52.1 in July, down from 53.7 in June.