UK services sector grows at fastest pace since August, PMI shows

The UK services sector experienced its fastest expansion in nearly a year in June, with the S&P Global UK Services PMI rising to 52.8, concurrently showing prices charged by firms increasing at the slowest pace since February 2021. This combination of robust activity and easing inflationary pressures strengthens expectations for the Bank of England to resume interest rate cuts in August following its recent pause. Despite the positive headline, the survey highlighted persistent concerns including weakening business expectations due to political uncertainty, ongoing labor cost pressures, and a continued decline in export orders.

Analysis

The UK services sector demonstrated its most robust expansion in nearly a year, with the S&P Global Services PMI increasing to 52.8 in June from 50.9 in May. Critically for the monetary policy outlook, this growth was accompanied by the slowest rise in prices charged since February 2021, a key disinflationary signal for the Bank of England. This combination of resilient activity and moderating inflation strongly reinforces market expectations for the BoE to resume interest rate cuts in August. However, the underlying data reveals significant headwinds. Business expectations for the year ahead have weakened due to political and economic uncertainty, including concerns over U.S. tariffs. Furthermore, the labor market remains strained; firms have reduced headcount for nine consecutive months, yet face persistent cost pressures from higher social security contributions and a nearly 7% minimum wage hike. The growth is also imbalanced, with a notable upturn in domestic new business contrasting sharply with a third consecutive monthly decline in new export orders, which fell at a faster rate due to weaker demand from Europe and the U.S.

Key Decisions for Investors

• Given the data supports a potential Bank of England rate cut in August, investors might consider increasing exposure to UK gilts and rate-sensitive domestic sectors that would benefit from lower borrowing costs.
• Exercise caution with UK companies heavily reliant on international sales, particularly to Europe and the U.S., as the survey signals an accelerating contraction in export orders.
• Closely monitor upcoming data on business confidence and labor costs, as the report indicates that weakening forward expectations and persistent wage pressures are key risks that could challenge the current domestic-led recovery.