The UK private sector has shrunk for the first time since January, with firms hit by weakening activity as higher interest rates hit demand, according to a survey by S&P.
"After a modest recovery over the past six months, service sector businesses are now clearly feeling the impact of rising interest rates on client demand," said Tim Moore, economics director at S&P Global Market Intelligence.
The headline seasonally adjusted S&P Global/CIPS UK services PMI business activity index registered a 49.5 reading in August, down from 51.5 in July and was the lowest since January. A reading below 50.0 signals contraction.
Businesses cited weaker business and consumer spending, combined with the impact of higher borrowing costs on client demand.
A lack of new work to replace completed projects resulted in the fastest decline in backlogs for just over three years, the survey showed.
Higher wages continued to push up business expenses, but the overall rate of input price inflation was the joint-lowest since May 2021, S&P noted.
Softer cost pressures and greater competition for new work contributed to the weakest rise in prices charged by service providers for two years in August.
The EY ITEM Club said while recent upside surprises in the official pay data mean another 25-basis point rate rise at this month's Monetary Policy Committee meeting remains likely if not certain, today's more "dovish survey results reinforce the EY ITEM Club’s view that the current rate rising cycle is close to a halt."