The UK’s services sector expanded at its fastest pace in four months in August, offering fresh evidence of a gradual recovery in business activity while persistent cost pressures continued to weigh on the outlook.
The S&P Global UK services purchasing managers’ index rose to 52.5 in August from 52.1 in July, its highest level since April. A reading above 50 indicates expansion, while a figure below 50 points to contraction.
The result was nevertheless slightly weaker than economists had expected, with the consensus forecast standing at 52.8.
Tim Moore, economics director at S&P Global Market Intelligence, said: “August data highlighted improving operating conditions across the UK service economy.
“Service providers are increasingly optimistic about the year ahead business outlook, with confidence levels now close to those seen just prior to the Middle East conflict.
“However, business activity growth projections were still subdued in comparison to long-run trends amid lingering worries about inflationary pressures and geopolitical tensions.”
Companies linked the improvement in activity to a “modest improvement” in wider economic conditions and reduced risk aversion among clients.
Both business and consumer demand contributed to the recovery, with new order volumes returning to growth.
But the improvement remained uneven. Export sales fell for a sixth consecutive month as demand from Europe remained subdued and geopolitical uncertainty continued to weigh on international trade.
The survey also pointed to a potential stabilisation in the UK labour market. Employment declined at its slowest pace since October last year, with businesses attributing the easing in job losses to healthier order books and greater confidence about future trading conditions.
The combination of improving demand and slower employment losses suggests that the services sector may be moving beyond the weaker conditions seen earlier in the year, although the recovery remains modest by historical standards.
Cost pressures remain a constraint.
Matt Swannell, chief economic adviser to the Item Club, said: “Respondents also reported strong cost increases through August and cited inflationary pressures as a key constraint on their optimism looking ahead.
“How the conflict in the Middle East plays out remains central to the inflation outlook, but we do not expect the recent uptick in inflation to change the MPC’s wait-and-see approach given that second-round inflation effects are yet to emerge.”
The latest survey leaves the UK economy facing a familiar trade-off: stronger services activity and improving business confidence on one side, against elevated input costs and geopolitical risks on the other.
For the Bank of England, the persistence of cost pressures will remain a key consideration as policymakers assess when to alter monetary policy. The services sector is particularly important to the inflation outlook because it is more exposed to wage and labour costs than many goods-producing industries.
The August PMI therefore provides some encouragement on growth without materially changing the broader picture of a UK economy still expanding at a relatively subdued pace.
Export weakness, geopolitical uncertainty and renewed inflation pressures remain significant risks, while the recent slowdown in job losses offers some evidence that businesses are beginning to look beyond the immediate downturn.
