UK private sector growth accelerates despite record job losses

The United Kingdom’s private sector expanded at its fastest pace in four months during August, yet this economic rebound has failed to reverse a prolonged period of employment contraction. New estimates indicate that while business activity strengthened, the labour market continues to struggle, marking the twenty-third consecutive month of job losses. This streak represents the longest run of employment declines recorded since purchasing managers’ index surveys began in 1996. The overall private sector index rose to 52.5, surpassing the neutral threshold of 50 and outperforming the previous month’s reading of 52.2.

The acceleration in growth was driven primarily by a boost in the services sector, which offset a slowdown in manufacturing. The manufacturing index fell from 51.9 to 51.5 as precautionary stock building cooled. Despite these gains in activity, the unemployment rate has climbed from 4.4 per cent to 4.9 per cent since the Labour government took office in mid-2024. Chris Williamson, chief business economist at S&P Global, noted that while the rate of job losses is moderating, firms remain cautious. He attributed the current expansion to favourable weather and technology investment, but warned that cost pressures remain high due to energy prices, supply disruptions linked to the Middle East conflict, and elevated staffing costs.

Policy decisions have also contributed to the challenging environment for businesses. The government’s first budget in 2024 included increases to the minimum wage and national insurance contributions for employers, which have been cited as factors hampering hiring. According to the British Chambers of Commerce, a typical small firm’s cost stack has risen by approximately 70 per cent since 2016, with more than a quarter of that increase occurring since the 2024 budget. Rob Wood, chief UK economist at Pantheon Macroeconomics, suggested that improved business sentiment could push third-quarter growth above Bank of England expectations. He estimated that the average index readings for July and August align with quarter-to-quarter GDP growth of 0.2 per cent, exceeding the monetary policy committee’s forecast of 0.1 per cent, although he cautioned that budget uncertainty and higher energy prices may dampen demand in the autumn.