The UK’s latest Purchasing Manager’s Index (PMI) reflected increased business confidence and impressive July growth, rising from 52.3 in June to 52.7.
However, the report paints a mixed picture for trade, with exports of manufactured goods hindered by high freight costs, despite output increasing rapidly.
Red Sea challenges
Manufacturing growth was impressive, outperforming services, with output reaching the highest levels seen since February 2022.
However, this didn’t translate to strong trade in goods, as the report also noted that exports were down significantly, recording the joint-weakest figure for two and a half years.
This comes amid ongoing freight challenges as a result of the Red Sea crisis, with elevated freight costs keeping inputs high.
Chris Williamson, chief business economist at S&P Global Market Intelligence, warned that this is one of several economic markers that could make the Bank of England (BoE) hesitant to lower interest rates.
“Policymakers will likely take a cautious approach to loosening policy amid signs of inflationary pressures pivoting away from services towards manufacturing, where Red Sea shipping delays and higher freight prices are adding to costs again.”
Services strength
High prices charged by UK services firms have stoked inflationary fears ever since the UK hit its target of 2%, with the BoE citing the sector for its ongoing refusal to cut interest rates.
However, while still expanding, services growth was less impressive this month. Despite more new work recorded in July, “the pace of activity expansion was still among the softest recorded in 2024 to date”.
In contrast to the manufacturing sector, international demand picked up significantly with the fastest increase in new export orders for 16 months. This has been partially attributed to overseas firms’ hesitancy to place orders ahead of the UK general election.
Growth upgrade
Since the election, there’s been good economic news for the UK, as the international financial community welcomed the new government’s fiscal plans.
The IMF upgraded the UK’s growth projections to 0.7% for 2024, having previously been set at 0.5%. A host of large international banks, include Goldman Sacs and Deutsche Banke, followed suit, boosting their UK forecasts.
Internally, confidence is also growing. Despite the predictions of delayed interest rate reductions, Nationwide made headlines this week as the first major lender to start offering sub-4% mortgages.
Despite falling from their 16-year high of 5.25% last summer, mortgage rates climbed again earlier this year in response to pre-election BoE hesitation.
Productivity questions
While the PMI figures were strong, there are still long-term questions over the country’s lagging productivity – middling in the G7 and 16% lower than in the US and Germany – and a high number of vacancies across both skilled and unskilled roles.
Across parties, consensus is that record levels of economic inactivity – people neither in work nor looking for work – as a result of long-term sickness is responsible, placing pressure on the new government to resolve NHS funding shortfalls and patient backlogs.
Earlier this month, health and social care Wes Streeting promised significant reform of the health service to enhance the economy:
“This government’s agenda for health and social care can help drag our economy out of the sluggish productivity and poor growth of recent years.
“By cutting waiting lists, we can get Britain back to health and back to work, and by taking bold action on public health we can build the healthy society needed for a healthy economy.”
