The UK economy’s growth is projected to decelerate, according to new data, as discussions continue regarding the legacy left by the Conservative government.

Business sector surveys, including the August purchasing managers’ index (PMI), indicate that economic growth may range from 0.3 to 0.4 percent in the three months starting from July. This is a slight decline compared to the 0.7 percent and 0.6 percent growth recorded in the first and second quarters, respectively.

The UK saw accelerated growth earlier this year, making it the fastest-growing economy among the G7 countries in the first half of the year. This was driven primarily by an expanding services sector, increased government spending, and reduced inflation.

The robust early-year performance challenged Labour’s claims of having inherited one of the most troubled economies since WWII.

The upcoming third-quarter figures, predicted to show a modest slowdown, are particularly significant as they will be the first official growth numbers under the new Labour government.

“Quarter-on-quarter GDP growth will remain solid in the second half of 2024; however, we do not expect the economy to sustain the above-trend growth seen in the past two quarters,” stated Peter Arnold, chief UK economist at EY Item Club.

August surveys highlighted rising output in the manufacturing sector, which saw its best performance in over two years despite previous challenges like high energy prices, supply chain disruptions, and weakening global demand led by China.

The dominant services sector also maintained strong output levels, showing its best performance in four months. Employment levels in both sectors increased, highlighting the labour market’s strength.

While these figures don’t directly correspond to GDP performance, they suggest an annual growth rate of 1.2 percent for the UK economy this year, according to Sanjay Raja, an economist at Deutsche Bank. This is a significant rebound from last year’s 0.1 percent growth rate when the economy briefly fell into a mild recession, although it remains below Labour’s target of 2 percent growth over the parliamentary term.

The UK pound reached a 13-month high against the dollar at $1.31 on Thursday, reflecting strong PMI figures and anticipation of a forthcoming interest rate cut in the US next month.

Sterling also rose to €1.18 against the euro, as Germany’s private sector surveys indicated another downturn, increasing the likelihood of a rate cut from the European Central Bank in September. ECB policymakers left open the possibility of another rate easing at their last meeting.

“The surveys highlight a growing divergence in growth sentiment between the eurozone and the UK,” remarked Francesco Pesole at ING.

For the Bank of England’s monetary policy committee (MPC), not all positive economic news is straightforward. The committee aims to keep inflation at 2 percent annually. The rise in the employment index to a 14-month high could concern some hawkish policymakers about wage pressures potentially leading to broader price increases.

“Employment rose faster than implied by the PMI output balance, suggesting firms are hiring in anticipation of stronger future output,” noted Elliott Jordan-Doak, senior UK economist at Pantheon Macroeconomics.

“Both payroll and official Labour Force Survey employment measures grew last week, and the PMI indicates this will continue. This reduces the chances of further slack in the labour market, thereby supporting wage growth.”

Traders and most economists do not expect the Bank to mimic the US Federal Reserve with a rate reduction in September, aiding the pound’s value against major trading currencies.

The MPC recently cut interest rates for the first time since 2020, lowering the base rate from 5.25 percent to 5 percent. Further incremental cuts are anticipated over the next 12 months, which the government hopes will alleviate household financial pressures and boost private sector investment.

● Private sector activity in Germany dropped unexpectedly this month, underscoring growth challenges for Europe’s largest economy. The composite purchasing managers’ index fell from 49.1 to 48.5 in August, below the 50 mark that separates growth from contraction. German businesses reported declines in manufacturing, services, and overall employment levels. These figures heighten concerns about Germany’s stagnant economy over the past year and increase pressure on the European Central Bank for a second interest rate cut in September. “Germany remains the ‘sick man’ of Europe,” commented Chris Hare at HSBC.