UK Services PMI (August): reaction

While August's contracting final services PMI figure is good news, it still came in higher than the flash estimates released last month. Nonetheless, the Bank of England will see this as an encouraging leading indicator as sticky services and core inflation are finally heading in the right direction. However, overall cost concerns still paint a bleak picture, especially if customers continue to spend, as companies retain pricing power and are more likely to still pass on higher costs. That said, it's difficult to predict where services inflation will head next. On the one hand, pandemic savings are beginning to dry up and are getting closer to hitting 2019 levels. This could impact discretionary spending. On the other, real wages are rising again and could offset this. Nonetheless, given that there's wage growth and unemployment data next week, followed by another CPI reading before the next MPC meeting, today's print may not be too meaningful in the grand scheme of things.

Service businesses need to realise they're essentially a luxury purchase, and have to earn the right for every sale. Whether a business is B2B or B2C, belts are being tightened regardless, and this is impacting service-based businesses more than most. There's almost always a cheaper option, or the tyre-kicker preference of delaying or scaling back on purchases. There are some very worried service providers in the UK economy right now, and rightly so.

The economy is definitely more subdued, with a growing pressure on marketing budgets. However, August does tend to be a quieter month as it is the holiday season so a lot of people are away. I think the latter part of the year will remain fairly flat, but there are still great opportunities out there for businesses: they just need to work harder to take them.

An intention and consequence of the Bank of England's interest rate rise cycle, which appears to still be ongoing, is reducing demand from businesses and consumers. And while economists tell us that the full effects of rate rises will take a while to work through the economy, their impact is being seen in dampened demand in the services sector. Too much rate-rise medicine for the price rises afflicting the UK economy could tip us into a recession and require another severe remedy. It feels like we are all walking the wire in this balancing act together, with nobody exempt from the consequences.

Rising costs and rising interest rates are dampening demand. This, combined with a reduction in confidence, means that businesses are spending less with service providers. As demand decreases and capacity frees up, we should see competition between service providers and a reduction in prices.