UK service sector disappoints, as UK growth concerns rise once again

The July PMI data for the UK was weaker than expected. The service sector reading weakened sharply, to 51.2 from 52.8, suggesting that Q3 growth got off to a bad start, as the key drivers of the UK economy show signs of weakness.  

Service sector weakness worries investors

Overall, UK private sector output continued to expand this month, the composite PMI was 51.0, down from 52.0 in June. The rate of growth was only marginal and has lost momentum as we move into Q3. There are some worrying developments in this month’s PMI report, firstly, the employment component decreased at its fastest pace since February, those surveyed talked about the need to reduce headcount in response to higher payroll costs and subdued demand.

Employment concerns

This is another sign that the labour market is softening and supports next month’s interest rate cut from the Bank of England. It also suggests that private sector businesses are burdened by elevated wage growth and the increase in employers’ national insurance. With the prospect of the UK government having another tax raid later this year, private businesses are shedding staff to protect all the cash flow that they can.

The PMI report stated that service providers are noticing headwinds to sales pipelines from fragile consumer confidence and geopolitical conditions, which could weigh on growth later this quarter.

Cost prices and new orders struggle

The manufacturing sector PMI remains mired in negative territory, and goods producers noted that challenging economic conditions remain. New orders declined in July and price pressures are also risi

ng, which suggests that UK inflation could remain elevated for some time. Cost burdens have increased across the private sector, and input price inflation rose after June’s 6-month low. Prices charged by private sector businesses also rose sharply this month.

The silver lining…

Although new business, employment and price pressures were weak spots in this report, there was some good news. Businesses remain optimistic that activity will pick up in the next 12 months. Hopes that lower borrowing costs, pent up consumer demand and a pickup in global investment will also boost activity, could see this index pick up once more in August.

Car production hits lowest level since 1953

This news comes at the same time as the Society of Motor Manufacturers said that vehicle production hit its lowest level since 1953, in the 6-months to June. The closure of Vauxhall’s Luton plant, combined with uncertainty over tariffs have weighed heavily on UK car production, and until this picks up, manufacturing growth is likely to be dented.

Pound declines as more economic woe faces the UK

A weaker than expected PMI report has weighed on the pound, which is the weakest currency in the G10 FX space so far on Thursday. GBP/USD is backing away from the $1.3590 highs reached on Wednesday and is testing the air below $1.3550, even though the dollar’s performance is mixed so far. UK yields are falling, as bond traders’ price in entrenched weakness in the UK’s economy.

The euro is not getting much benefit from hopes that the EU and the US have reached a trade agreement with a 15% levy attached to European exports to the US. The agreement has not been finalized, and the US did not confirm that this was the rate agreed. However, a 15% levy along with a sign that Europe’s manufacturing slowdown is coming to an end, after the Eurozone PMI report for July rose to its highest level for nearly a year, could boost the euro later this week, and it is helping stocks to extend Wednesday’s gains. Today’s ECB meeting should be fairly uneventful and no rate change is expected.

Tesla’s share price takes a battering after weak earnings report

Tesla’s share price will also be in focus later today. It is currently down more than 6% in the pre-market, after last night’s weak earnings report. In contrast, Google’s share price is higher by 3% in the pre-market, after its earnings report for last quarter was well received, even though it is continuing to spend vast sums on its AI ambitions.