Britain's private sector grew at its slowest pace in three months in September. The S&P Global UK Composite PMI, a monthly survey of purchasing managers that tracks output across services and manufacturing, fell to 51.7 from 52.5 in August, according to flash figures published this morning by S&P Global. Economists had expected 52.0. Any reading above 50 signals expansion, so the economy is still growing, just more slowly. The services index, which covers roughly four fifths of output, also dropped to 51.7, while the manufacturing PMI edged up to 52.0, a three month high, even as factory output itself slipped to a six month low.
The detail is less comfortable than the headline. Total new work fell slightly after two months of marginal growth, and export orders dropped at the fastest pace since June, with manufacturers reporting their first fall in overseas orders since December. Costs moved the other way. Input price inflation rose to its highest since June on energy, fuel and raw materials, and the prices firms charge climbed at the quickest rate since June as well. Staff numbers were cut for a twenty fourth consecutive month, though more gently than earlier in the year. Chris Williamson of S&P Global described "a worrying combination of disappointingly sluggish economic growth and intensifying inflationary pressures", with output consistent with growth of just 0.1% a quarter.
That combination is awkward for the Bank of England, which sets UK interest rates. Last week it held Bank Rate at 3.75% on a six to three vote, with Megan Greene, Catherine Mann and Huw Pill backing a quarter point rise to 4.00%. Firmer prices keep a rise at the next decision on 5 November in play, while slower growth argues for patience. Across the Channel the picture is the reverse. The euro area composite jumped to 53.1 from 52.0, its strongest reading in 41 months and well above the 51.5 forecast, with France back in growth for the first time in ten months and Germany at an eleven month high. In August Britain was growing faster on this measure. It no longer is.
What it means for GBP/EUR
The pound absorbed the gap with little fuss. GBP/EUR traded around 1.1649 today in a narrow 1.1648 to 1.1660 range, close to where it stood after the European Central Bank raised its deposit rate to 2.50% on 10 September, and below the 1.1708 high of 14 September. Sterling is being held up by the prospect of higher UK rates rather than by UK growth, and that support lasts only as long as inflation stays stubborn. With the euro area now showing both stronger activity and firmer prices, S&P Global suggested the case for another ECB rise has strengthened, which would narrow the interest rate gap that has favoured the pound. That leaves GBP/EUR exposed to any sign the Bank of England is in less of a hurry. For a business with euro invoices to settle over the coming months, a forward contract fixes today's rate for a payment due on a future date, taking the 5 November decision out of the budget.
