The private sector economy in the UK experienced faster-than-anticipated growth in August, though businesses are apprehensive about potential tax increases in Chancellor Rachel Reeves’s first budget.

The final S&P Global composite purchasing managers’ index (PMI) climbed to 53.8 in August, a notable rise from July’s 52.8 and surpassing analysts’ predictions of 53.4. This reading marks a four-month high, remaining above the critical 50-point line that distinguishes expansion from contraction.

Additionally, services sector activity accelerated, with the PMI score increasing to 53.7 from 52.5. Meanwhile, the manufacturing PMI recorded a figure of 52.5.

Analysts attributed the uptick in consumer spending to improved political stability following the general elections in July, alongside favorable macroeconomic conditions. Anticipated interest rate reductions by the Bank of England further bolstered demand.

In terms of pricing, inflation for services, a key indicator closely monitored by the Bank, fell to its lowest level in three and a half years, while input cost inflation hit its weakest mark since January 2021. According to the Office for National Statistics, overall inflation increased slightly to 2.2% in July, up from 2% in June.

Tim Moore, the economics director at S&P Global Market Intelligence, stated, “August data underscored a resurgence in the performance of the UK services sector, buoyed by improving economic conditions and domestic political stability that enhanced customer demand.”

Recent GDP statistics indicate that the UK economy expanded at the highest rate among the G7 nations in the first half of this year.

The PMI survey compiles data from a variety of sectors, including hospitality, entertainment, finance, insurance, and business services.

Rob Wood, chief UK economist at Pantheon Macroeconomics, noted that the PMI findings suggest the Bank of England “can safely continue to lower interest rates,” but emphasized that any rate cuts should be approached with caution.

Thomas Pugh, an economist at RSM UK, remarked that the Bank is likely to be cautious about the increased demand for labor, indicating that the economy appears stable enough to delay any immediate rate cuts in September.

S&P Global’s research revealed that rising labor costs and increased shipping rates are commonly cited by services companies as contributors to their escalating expenses.

On August 1, the central bank reduced interest rates for the first time in over four years, cutting them by 25 basis points to 5%, with further reductions expected later this year.

In response to enhanced sales figures, services firms increased their workforce for the eighth consecutive month. Although, exports remained “subdued,” with Brexit-related trade challenges reported as a barrier to sales with EU clients.

Despite the rise in economic activity, household disposable income pressures persisted, dampening consumer demand. Many individuals are opting to save rather than spend, taking advantage of high interest rates.

While August saw an acceleration in output, businesses expressed less optimism about future trading conditions. Analysts point to concerns regarding potential tax increases or spending cuts in the upcoming Labour government’s first budget.

Moore commented that the initial optimism following the general election began to wane in August. While hopes for interest rate cuts and ongoing economic improvements supported business confidence, uncertainties surrounding policy changes ahead of the autumn budget were also raised by some firms.

Chancellor Reeves indicated in her remarks that she faces “difficult decisions” regarding tax, expenditure, and benefits in her first fiscal statement scheduled for October 30, due to a £22 billion budget deficit. Speculation suggests she may look to raise revenue through adjustments to capital gains and inheritance tax. Economists have raised concerns following her decision to reduce investment plans in July and maintain austere budgets for certain government departments.

Plans inherited from former Chancellor Jeremy Hunt included £20 billion in real-term cuts for unprotected government departments.