UK: Services-Led Growth and Price Risks – Nomura

Nomura's European economics team reported that UK economic activity in August showed a services-led recovery, but price risks persist. Data showed that the UK's August composite output Purchasing Managers' Index (PMI) rose to 52.5, indicating a return to expansion territory. This growth was primarily driven by the services sector, effectively offsetting continued weakness in manufacturing. Meanwhile, the GfK consumer confidence index climbed to its highest level in two years, providing additional support to overall economic activity.

**Services Expansion and Consumer Recovery Provide Short-Term Support**

The strong performance of the services sector is the core driver behind the PMI rebound. The notable improvement in consumer confidence reflects a more optimistic household outlook on the economic prospects, which is expected to continue supporting services consumption and overall output in the coming months. Nomura analysts believe these positive signals indicate that the UK economy gained growth momentum in the early third quarter, temporarily shaking off the previous period of sluggishness.

**Potential Price Pressures Complicate the Policy Path**

Despite improved growth data, inflation risks remain a thorny challenge for the Bank of England. Nomura previously noted that UK core inflation, particularly services inflation, has shown considerable stickiness. Upstream services prices, such as transportation and warehousing costs, have risen sharply, which could potentially pass through to the consumer end in the future. This coexistence of growth and price risks makes the Bank of England's monetary policy path more complex. Market views suggest the central bank needs to strike a difficult balance between supporting the economy and curbing inflation.

**Policy Outlook Depends on Inflation and External Risk Evolution**

The Bank of England's next moves will be highly data-dependent. According to Societe Generale analysts, services inflation has recently shown signs of easing, and the labor market has also become looser, supporting the central bank's decision to hold steady for now. However, if external factors such as geopolitical conflicts trigger a new surge in energy prices, the possibility of the central bank being forced to tighten policy further cannot be ruled out. Nomura's report also emphasized the persistence of price risks, suggesting that the current growth recovery may be accompanied by the challenge of inflation being slow to return to target.