Pound Swamped in Losses after Services Sector Softens in Latest Business Surveys

PoundSterlingLIVE – “High interest rates continue to cast a shadow over the UK economy” – S&P Global.

Pound Sterling exchange rates fell widely in midweek trade after respondents to S&P Global surveys cited high interest rates and other headwinds for an August softening of business conditions in the services industry that has so far underpinned the domestic economy with possible implications for Bank of England (BoE) interest rates up ahead.

August’s survey results cited borrowing costs and other pressures on corporate and household incomes for a “marginal” decline of activity in the breadwinning services sector as well as a “sharp and accelerated” decline of output from the manufacturing industry.

“High interest rates continue to cast a shadow over the UK economy, creating a lull in new orders, stunting output, and ensuring prospects for the private sector remain uncertain,” says John Glen, chief economist at the Chartered Institute for Purchasing and Supply.

Activity fell as a second decline in new orders for private firms deepened an earlier downturn in the manufacturing sector while also impacting the services sector with knock-on implications for employment and company earnings expectations of the year ahead.

Some companies reportedly turned to backlogs of unfinished work to keep busy for a fourth month running in August, leading to further “excess capacity” and some job losses in the manufacturing sector with new hiring also slipping to its slowest pace since March in the services sector too.

August’s results pushed the numerical S&P index value measuring services sector business conditions below the 50.0 level for the first time since November last year, which matters because any index value below 50.0 is typically interpreted as an indicator of recession.

Index values for both manufacturing and services industries now sit below the 50.0 level though the surveys do have a history of overstating and understating changes in activity, and August’s edition of the surveys wasn’t all bad news.

More positively, average cost burdens rose at their slowest pace since February 2021 despite recently reported wage increases lifting input cost price inflation while output prices charged by companies fell in what is potentially a harbinger of further disinflation being in the pipeline.

“That echoes what we’ve seen in various other surveys too,” says James Smith, a developed markets economist at ING, in response to Wednesday’s surveys.

“Remember that much of the impact of past rate hikes is still to feed through, given the heavily-fixed nature of the UK’s mortgage market,” he adds.

Further declines in inflation would likely be welcomed by the Bank of England (BoE) and could be supportive of economic activity up ahead but the economic outlook is clouded by uncertainty over the likely effects of an almost record increase in interest rates and widespread speculation suggesting further increases in pipeline.

“We doubt the Committee would raise rates to the 6% level priced-in by markets. But the MPC likely will not be willing to take any risks with the inflation outlook and probably won’t have seen enough hard evidence by their meeting next month to press the stop button,” says Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

The UK economy grew by an average of 0.2% in the opening quarters this year while the BoE projected an unchanged rate of expansion for the second half of the year in August but greater numbers of mortgaged households will be rolling onto sharply increased interest rates each month that passes with uncertain implications for the economy.

Much has been made in and around financial markets about the recent high single-digit percentage increases in wages and their possible implications for inflation if interest rates are not deployed in order to reduce demand in the economy by an equivalent amount, but the BoE and other factors have already potentially gone further than that.

Bank Rate was raised from 0.1% in December 2021 to 5.25% in August, imposing heavy additional costs on mortgage borrowers, while the average household energy bill was also around £600 higher in August this year when compared with the average £1,339 tariff level prevailing in the opening quarter of 2022.

An original version of this article can be viewed at Pound Sterling Live