Economic activity slowed in the UK as higher interest rates affected spending

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A closely watched survey showed that economic activity in the UK slowed sharply in July as higher interest rates hit consumer spending and an industrial slowdown worsened.

The UK’s services PMI output index, a measure of activity in the sector, fell to a six-month low of 51.3, according to new data released Monday.

Meanwhile, the industrial production index hit a seven-month low of 46.5, indicating that the majority of companies were reporting a contraction. This sent the composite index, which combines the two sectors, to a seven-month low of 50.7, down from 52.8 in June.

Chris Williamson, chief business economist at S&P Global Market Intelligence, which publishes the index with the Chartered Institute of Purchasing and Supply (Cips), said the data showed the UK economy was “coming to a halt”.

Rising interest rates and the rising cost of living appear to be taking an increasing toll on families. . . Meanwhile, manufacturers are cutting production in response to an alarmingly sharp drop in orders, both from the domestic and export markets.

The survey was conducted against the backdrop of a sharp rise in UK mortgage rates, after stubbornly high readings of inflation and wage growth led the Bank of England to raise its benchmark interest rate to a 15-year high of 5 per cent in June.

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

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

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

“The rate hikes delivered so far appear to be increasingly slowing the economy,” said Samuel Toombs, of Pantheon Macroeconomics consultancy.

He added that the data strengthened the Bank of England’s position to stop raising interest rates soon, and to provide an increase of only 0.25 percentage points, instead of 0.5 percentage points in the next month.

Service-sector firms responding to the survey said a weak real estate market was hitting activity, and businesses and consumers alike had cut back on discretionary spending.

Manufacturers said the slowdown in European markets was hurting demand for new orders. They have boosted their production in part by reducing backlogs as previous bottlenecks in supply chains eased and it became easier to hire staff that had previously been in short supply.

There was also evidence of easing inflationary pressures. Companies that responded to the survey said both costs and selling prices are still rising, but at a slower pace since early 2021.

However, service sector firms were still able to pass on higher wage costs to clients, a trend that will reinforce BoE concerns about a tight labor market fueling persistent inflation.

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