4 August 2026: The UK manufacturing sector reports a slowdown in growth

EY, the professional services firm, is among the forecasters whose use of the R- word (recession) draws attention. It has nudged up its UK growth forecast to a solid, if unspectacular, 0.9 per cent for 2026. But it was the warning that came with it that caught the eye. “If the Strait of Hormuz reopens in the coming months, we expect the UK to avoid a more pronounced downturn, but an extended closure into 2027 would raise inflation and could push the economy into contraction,” said Peter Arnold, EY's UK chief economist.

A recession occurs if an economy records two consecutive quarters of negative growth. Arnold fears that could happen if the Strait of Hormuz remains closed into next year.

About a fifth of the world's oil and gas travels through it, not to mention agrichemicals and the like. Britain doesn't source much of its energy from the region, but it doesn't matter: if the closure results in a sharp rise in global prices, everyone pays more.

The upshot could be the worst possible sort of recession: one driven by a price shock, forcing the Bank of England to hike interest rates at a time when the economy needs the stimulus of lower rates. In other words, stagflation.

Stagflation is the economist's equivalent of the ‘bogeyman’. It rarely appears, but when it does it wreaks havoc.

Unfortunately, the 2.6 per cent recorded in June remains above the Bank of England's 2% target, and it is expected to rise from here, while the number of members of the MPC voting for a hike slowly increases.

Both employers and workers will grow tired of their profits or wages shrinking over the course of the year, and sooner or later they will either pass higher costs on to customers or demand larger wage increases from employers. These are the ‘secondary effects’ that MPC members like to quote, the ‘insidious buildup’ that BoE economist Huw Pill is most concerned by.

Stagflation will test the resolve of those charged with creating monetary policy, since they are damned if they do and damned if they don't when it comes to raising interest rates.

The UK’s manufacturing sector grew compared with last month, but at a slower pace, according to new figures.

The S&P Global UK manufacturing PMI survey, closely watched by economists, recorded a reading of 51.9 in July. This was a slight slowdown from 52.5 in June and marked the lowest level for four months. Any reading above 50 indicates that activity is growing, while any score below 50 means it is contracting. It was also below the 52.5 reading predicted by market analysts.

The more ancient among us will remember Denis Healey. Like his bushy-browed predecessor from fifty years ago, John Healey faces strikingly similar challenges: anaemic growth, high inflation and unstable oil prices. But his mission could not be simpler: Don’t repeat the catastrophic mistakes that pushed Britain to the brink of bankruptcy half a century ago.

In less than three months, he will give us the clearest indication of whether he has learned the lessons of history when he delivers the first Budget for Andy Burnham’s new government.

The Yorkshireman must utilise his blunt honesty and frugality to confront the harsh economic realities facing us.

The pound’s performance yesterday was flat-to-slightly negative, with small declines across most major pairs. Movements were incremental, not driven by major macro catalysts, and reflected a market in wait-and-see mode ahead of upcoming US and UK data releases.

If the Fed holds fewer policy meetings, markets receive fewer policy signals, volatility likely increases around data releases, and rate expectations become less certain. This effectively allows markets to resemble the Wild West, with no sheriff to calm citizens' (economists’) fears.

Fewer meetings mean fewer scheduled opportunities to adjust interest rates, so each meeting carries more weight. Markets must rely more on economic data than on regular Fed communication, increasing uncertainty.

Fed Chair Kevin Warsh argues the Fed “overcommunicates.” Cutting meetings reduces forward guidance. Markets must price a wider range of possible outcomes, increasing uncertainty.

However, he cannot ban FOMC members from communicating their views of the economy in a ‘semi-official’ way. The financial media will quickly pick up on it if a majority of FOMC members express concerns that inflation is rising or job creation is falling and decide that a change in interest rates is unavoidable.

If inflation or labour data shift sharply between meetings, the Fed may need off-cycle emergency sessions, which always shock markets, since they portray a central bank not on top of its mandate.

There will likely be a trade-off between “official” comments and unscheduled “off-the-cuff” remarks by FOMC members.

John Williams, President of the Federal Reserve Bank of New York, was the first to stick his head above Warsh’s parapet. He told reporters yesterday that he supported the Federal Open Market Committee's decision to hold rates at 3.50%-3.75% at its meeting last week. He said in an unscheduled interview that he expects inflation to ease over the rest of this year and next.

But he added that the Central Bank will have to act if price pressures don't cool sufficiently to put inflation on a path to return to the Federal Reserve's 2% target. Williams's base case foresees inflation reaching that point in 2028, after exceeding that level for more than seven years.

The latest ISM manufacturing report delivers a simple message: America’s factory floor is continuing its robust renaissance, driven by tariffs and tax cuts.

The July ISM Manufacturing PMI jumped 2.3 points to 55.6, well above market expectations and comfortably above the 50 line that separates expansion from contraction. This was the seventh straight month of expansion and the strongest reading since May 2022.

Responses in the Institute for Supply Management survey published yesterday, however, were overwhelmingly negative, with Iran dominating the comments. Price volatility was also a common theme among respondents, leaving some economists confident that the Federal Reserve would raise interest rates as soon as next month.

Still, the improvement in activity, especially the return to growth in manufacturing employment for the first time in 33 months, was cheered by economists.

Purchasing managers feel that the cost of everything coming through the door has gone up since oil prices jumped in early March. Manufacturing companies will pass those increased transportation costs through as quickly as they can, just as truckers have already passed their higher costs on to manufacturers. The Fed will pay attention to this.

The ISM said its manufacturing PMI increased to 55.6 last month, the highest reading since May 2022, from 53.3 in June. Economists polled by Reuters had forecast the PMI would edge up to 54.0.

The PMI this year has remained above the 50 threshold, indicating growth throughout the manufacturing sector. With business inventories at very low levels, there is ample room for manufacturing to expand. The Fed reported last month that factory production grew at its fastest pace in four years in the second quarter.

The dollar had a weak session yesterday, losing ground against nearly all major currencies. The dollar index’s tiny rise masked a broad pullback in the greenback, driven by data and sentiment.

Eurozone households curtailed spending after the start of the war in Iran, appearing more concerned about overall uncertainty than about faster inflation, according to research by the European Central Bank.

Confidence sank, and consumption slowed materially as the conflict erupted, economists wrote in an article for the ECB’s economic bulletin.

The slowdown was driven by weaker discretionary spending. Nominal outlays on energy rose, reflecting higher transport costs, while expenditure on housing and food was resilient. Higher-income households made the sharpest adjustments.

“The weakening in nominal consumption appears to have been driven largely by households that are not budget-constrained but are choosing to delay spending in response to heightened uncertainty,” the researchers said.

“Although higher prices associated with the war in the Middle East may also have played a role, the analysis suggests the presence of a sentiment-driven channel that persists even after controlling realised income.”

A 10-point drop in confidence from the previous year was associated with a reduction of about 0.4 percentage points in individual nominal consumption in April 2026, they said. That’s comparable to April 2022, when households grappled with Russia’s invasion of Ukraine.

While consumer sentiment has improved recently, shoppers haven’t necessarily got over the shock.

If households were to perceive the real income losses stemming from the conflict as persistent and associate them with lower real purchasing power, the initial sentiment-driven slowdown could become more entrenched.

The French economy grew by 0.2% in the second quarter, up from the first, official data showed, helped by a recovery in household spending and exports.

France’s second-quarter growth came after the Eurozone’s second-biggest economy contracted by 0.1% in the first quarter. This figure was in line with a Reuters poll of analysts.

The official statistics body INSEE said a rise in exports in the aeronautics sector had contributed most to the economic recovery.

France, along with many other European economies, is facing the impact of the war in Iran and tariffs imposed by the United States. In July, the government cut its overall growth forecast for 2026 to 0.7% from 0.9%.

Finance Minister Roland Lescure said the second-quarter growth figures showed the French economy was demonstrating resilience and provided reassurance regarding the overall 2026 growth target.

“It gives us some reassurance, in terms of our forecast of 0.7%,” Lescure told French radio.

The Euro’s performance yesterday was decisively bullish: Strong macro data boosted confidence in the eurozone outlook, markets priced in a higher probability of ECB tightening, and the US dollar’s weak macro backdrop amplified EUR gains.

This produced one of the euro’s strongest sessions in recent weeks, with EUR/USD breaking above key resistance levels and sustaining upward momentum.

Have a great day!