UK private sector output growth eases to three-month low in June

23 June 2023

Steep rate of prices charged inflation persists in the service economy.

Data collected 12-21 June

Business activity across the UK private sector increased for the fifth consecutive month in June. The latest survey illustrated another solid upturn in the service economy, whereas manufacturers continued to underperform as production volumes declined for the eleventh time in the past twelve months. Overall private sector output growth was the slowest since March, reflecting a much softer rise in new order intakes as some clients curtailed spending.

June data also highlighted contrasting inflationary pressures in the manufacturing and service sectors. Manufacturing companies signalled an outright reduction in factory gate charges for the first time in more than seven years. Service providers meanwhile recorded a further steep rise in their average prices charged, and the rate of inflation was only slightly softer than in May. There were again widespread reports of higher staff costs, which had been passed on to clients.

At 52.8 in June, down from 54.0 in May, the headline seasonally adjusted S&P Global / CIPS Flash UK Composite Output Index signalled only a moderate expansion of private sector business activity. The index has registered in positive territory since February, but the rate of growth eased further from April’s recent peak and was softer than the long-run survey average.

Service providers indicated another solid increase in business activity during June (index at 53.7), albeit the slowest rate of expansion since March. Some survey respondents noted a loss of momentum for consumer spending, while others cited weaker demand from clients in the construction and real estate sectors. Where growth was reported, this was often linked to resilient demand for business and financial services.

Output levels in the manufacturing sector decreased moderately during June and the rate of contraction was unchanged since May. Production cutbacks were attributed to falling new orders amid subdued underlying demand and a headwind from customer destocking.

Total new work across the UK private sector increased only slightly in June, with the rate of expansion easing further from April’s 13-month peak. The latest rise in new orders was the slowest in the current five-month period of growth. Service providers reported a solid overall upturn in new orders, despite many noting that cost of living pressures and higher interest rates had curtailed demand. In contrast, manufacturers experienced a steep and accelerated fall in new work, with survey respondents citing weak market conditions at home and abroad.

Despite softer rates of output and new business growth across the private sector economy, latest survey data signalled continued strength in the labour market. Job creation was recorded for the third month running and the pace of staff hiring was the fastest seen since September 2022. Higher levels of employment reflected another marked rise in service sector recruitment, which was mostly attributed to projected sales growth and efforts to boost business capacity.

Supply conditions improved again in June, as signalled by a reduction in vendor lead times across the manufacturing sector for the fifth successive month. Fewer instances of supply shortages encouraged firms to reduce their inventories, with stocks of purchases decreasing at the steepest pace since May 2020. However, weaker-than-expected demand meant that manufacturers’ stocks of finished goods increased to the greatest extent since November 2022.

A combination of lower demand and improving supply conditions led to a steep decline in manufacturers’ average cost burdens during June. The decrease in manufacturing input costs was the fastest since February 2016. Around 26% of the survey panel reported lower purchasing costs in June, while only 11% signalled a rise.

The number of service providers reporting higher business expenses (38%) continued to exceed those indicating a decline (3%) by a wide margin. This was overwhelmingly linked to rising staff wages. However, some firms noted a drop in input prices due to falling fuel and energy bills. Measured overall, the rate of service sector cost inflation was the lowest for 25 months, but remained steeper than at any other time since the summer of 2008.

Total private sector input cost inflation was the softest since February 2021, but prices charged inflation eased only slightly in June. A fractional decline in manufacturing output charges was more than offset by another sharp rise in prices charged by service sector companies. Around 25% of all service providers reported a rise in their output charges in June, while only 4% reported a fall. Reports from survey respondents suggested that strong wage pressures remained by far biggest factor leading to higher average prices charged across the service economy.

Looking ahead, private sector firms remain optimistic about their prospects for output growth during the next 12 months. The degree of confidence slipped to its lowest since January, but was still higher than the long-run survey average. Relatively upbeat expectations were recorded in both the manufacturing and service sectors, despite some reports citing concerns about the impact of higher interest rates and softer customer demand due to housing market weakness. Survey respondents typically noted resilient market conditions and positive sentiment regarding their long-term business expansion plans.

Commenting on the flash PMI data,Tim Moore, Economics Director at S&P Global Market Intelligence said:

“June's flash PMI survey indicates that the UK economy has lost momentum again after a brief growth spurt in the spring, and looks set to weaken further in the months ahead.

“Most notably, consumer spending on services, which was a core growth driver in the spring, is now showing signs of faltering as the reality of higher interest rates, the increased cost of living and gloom about the outlook sets in and overrides the brief boost to spending enjoyed from the pandemic tailwind. The manufacturing sector meanwhile continues to report recessionary conditions.

“One notable area of resilience in the economy is the labour market, with jobs growth accelerating in June as companies in the service sector continue to fill vacancies. While falling backlogs of work suggest this hiring trend could also fade in the coming months as the economy weakens, for now it is generating higher wage growth, in turn feeding through to still-elevated inflation pressures in the service sector. As such, the survey’s price gauges point to consumer price inflation remaining well above the Bank of England's target into 2024, which will add to the case for further interest rate hikes.

“Thus, while the June survey reveals the economy to be cooling as a result of higher interest rates, the stubbornly elevated price growth in the service sector suggests the Bank of England will consider its fight against inflation as still a work in progress. However, such rate hikes will clearly add further to the likelihood of a recession later in the year, which is looking increasingly inevitable as collateral damage in the fight against inflation.”

Dr John Glen, CIPS Chief Economist said:

“Inflationary rises were softer for the UK’s makers than service providers in private sector business last month as prices for raw materials fell and delivery times improved for the fifth month in a row. Materials became more plentiful as the supply chain difficulties of the last two years eased still further and significant disruption was left in the past resulting in the fastest fall in costs since February 2016.

“The service sector experienced the opposite effect. Wage demands contributed to another upward spiral in the costs of doing business. Almost 40% of service providers experienced higher business expenses in June as rising salary payments more than offset falling fuel and energy bills.

“The gulf between the two sectors became even wider in terms of job creation. While job hiring amongst service companies gathered pace, the decline in jobs amongst manufacturers became more entrenched.

“Recent interest rate rises will also add more stress on business investment. In the manufacturing sector, new orders fell again for another month, marking a year of shrinking workflows. Customer spending in the second half of 2023 is likely to shrink further as concerns over the UK economy gather pace with stretched affordability rates amongst consumers and businesses alike.”