Growth in the UK’s powerhouse services sector has cooled by more than expected to its weakest level in six months, according to a closely-watched survey of businesses.

As campaigning got under way for a general election that is widely expected to be dominated by the economy, the S&P Global UK Composite Purchasing Managers’ Index (PMI) suggested an overall slowing in the pace of business activity.

The index, in which any reading above 50 represents growth, came in at 52.8 for May – down on the 54.1 score achieved the previous month.

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The survey of purchasing managers, which takes in responses from services and manufacturing firms, had been forecast by economists to have been almost flat on April’s figure.

The report said a recovery in factory activity, which recorded its best monthly performance in two years, was more than offset by the weakening of momentum in services which suffered from a slowdown in new orders.

Its authors said the survey data was consistent with gross domestic product (GDP) rising by around 0.3% in the second quarter of the year to the end of June.

The Office for National Statistics has previously indicated an early estimate for growth during the first quarter of the year of 0.6%.

If realised, the PMI prediction for second quarter growth would represent a significant slowdown though it is in line with recent annual forecasts – such as from the Bank of England and International Monetary Fund.

The new year has marked the end of a six-month recession for the UK economy – a downturn that was largely blamed on the effects of interest rate rises by the Bank to tame inflation.

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The official rate of inflation is currently just above its target rate of 2% but April’s figure came in slightly hotter than had been expected, prompting financial markets to shift their bets for a first interest rate cut from June to August.

The calling of the election for 4 July means Rishi Sunak’s Conservatives, if that market mood is right, will not benefit at the polls from any cheer over a cut to borrowing costs.

The PMI survey suggested some concerns for the Bank around inflation would be soothed by its findings.

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Chris Williamson, chief business economist at S&P Global Market Intelligence, said: “With companies now reporting the slowest price growth in over three years, and headline inflation falling close to target, the PMI data support the view that the Bank of England will start cutting interest rates in August providing the data continue to move in the right direction over the summer.

“Such speculation of rate cuts has already fed through to improved business confidence, with optimism for the year
ahead lifting higher in May, adding to hopes that the battle against inflation can be won without the UK having
suffered a serious recession.”

The news that inflation had fallen to 2.3%, its lowest level for nearly three years, seems to be one of the reasons the PM called an election for 4 July.

Mr Sunak declared at his first stump speech: “The economy has turned a corner… our plan is working”.

The latest ‘economic optimism index’ for May from pollsters Ipsos suggests that many voters agree with him.

Some 33% of people say the economy will improve in the next 12 months – up 12 points from April (while some 37% say it will worsen).

The national economic mood appears to be on the rise and at its highest point since the summer of 2021 – around the time Britain exited lockdown and celebrated ‘Freedom Day’.

Will economic optimism lead to electoral success?

Historically, the link between voters’ economic expectations and election outcomes is mixed.

In 1983, growing economic optimism saw the Thatcher government secure a four-point swing towards it, against a divided opposition.

But in 2010, Gordon Brown’s government was voted out of office – suffering a swing of five against it – despite a similar proportion of the electorate thinking that the economy was improving.

And in 1997, Labour under Tony Blair won a landslide on a 10-point swing, even though voters were broadly positive about the direction of the economy.

The net economic optimism rating enjoyed by John Major back then (+13) was significantly better than that for Rishi Sunak at the moment (-4).

The last election is a notable historical anomaly, with Boris Johnson securing a swing of 4.6 points despite a prevailing mood of economic pessimism (-29).

But is the improving economic mood translating into greater support for the government?

At the moment, support for the Conservatives in the polls is static – around 23.2% in the Sky News poll tracker, nearly 21 points behind Labour.

The mood for change

So, why isn’t this upswing in economic optimism delivering the electoral rewards that one might expect?

Simply, the electorate has turned against the government and is in the mood for change.

In the latest polling by Ipsos some 66% of people disagreed that it deserved to be re-elected, while 73% said it was ‘time for a change’.

Ahead of the 1979 election, Labour PM Jim Callaghan famously wrote in his diaries, “there are times, perhaps once every thirty years, when there is a sea-change in politics. It then does not matter what you say or what you do. There is a shift in what the public wants and what it approves of. I suspect there is now such a sea-change and it is for Mrs Thatcher.”

The outcome of the 2024 election will hinge upon whether there has indeed been a sea-change in the mood of the electorate and whether signs that the economy has turned a corner will do little to change its mind.

The approach of business to general elections is not what it was.

Not that long ago, it was common for big corporates to make donations to political parties, including big FTSE 100 names such as SmithKline Beecham, United Biscuits, General Accident and Whitbread.

Most of these donations would go to the Conservatives but there were some companies, such as Marks & Spencer and Pearson, which also made donations to other parties.

Some, such as Hanson – whose founder Lord Hanson was a loyal supporter of Margaret Thatcher – continued to do so even after the 1992 Cadbury Report recommended companies stop making contributions to political parties.

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Even after the political contributions dried up, FTSE 100 chief executives were not shy about endorsing or criticising politicians at election time.

In 1997, a number of well-known business people including Robert Ayling of British Airways, Bob Bauman of the old British Aerospace (now BAE Systems) and George Simpson of GEC endorsed Tony Blair’s Labour ahead of that year’s election, while John Major’s Conservatives also had plenty of backers.

Business people were also happy to speak out about particular policies. Ahead of the 1997 election, BT’s chairman, Sir Iain Vallance, lashed out at Labour’s proposals for a windfall tax on the privatised utilities while Brian Stewart, chief executive of the pubs and brewing giant Scottish & Newcastle, criticised Labour’s plans to create a Scottish Parliament with tax-raising powers.

None of that happens any more. Most CEOs, while having their own political opinions like the rest of us, prefer to keep them to themselves. The more astute, realising that it makes sense to speak to politicians, are careful to ensure they are seen to be behaving even-handedly and not expressing a preference for one side or the other.

Business wish-lists

That does not mean businesses do not have their own wish-lists of policies.

This is particularly true of small businesses. Their wish-list has not changed in the last couple of decades and is topped by wanting a change in the law to enforce prompt payments from larger businesses to their suppliers and the reform of business rates, which is also a bugbear for larger companies in sectors such as retail and hospitality.

Higher up the corporate food chain, what big businesses crave most is clarity and consistency in policy.

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As Dame Amanda Blanc, chief executive of insurance, savings and pensions giant Aviva, told Sky News today: “Obviously we’re apolitical. What we want is for the environment to be one where we can invest, with certainty. You know, we want consistency and stability and so that whoever is the winner of the election, we want the election to be decisive, and we really want there to be certainty for us to be able to invest in things like UK infrastructure.”

Dame Amanda, who has served on both the prime minister’s business council and on the business taskforce put together by shadow chancellor Rachel Reeves, added: “We’ve invested £9.5bn in UK infrastructure in the last three years.

“Our commitment is £25bn over the next 10 years. In order to do that, you have to have a more certain environment. And so that’s what we look forward to.”

That desire for stability and consistency was why the brief tenure of Liz Truss in 10 Downing Street was so damaging and why, off the record, a lot of business executives will admit to being grateful to Rishi Sunak and Jeremy Hunt for restoring order to public finances after the firestorm created by Kwasi Kwarteng’s mini-budget in September 2022.

They feel it is the first time, since David Cameron was in office, that a PM had the corporate world’s back. Theresa May alienated a lot of globe-trotting CEOs with her infamous 2016 speech in which she said “if you believe you are a citizen of the world, you are a citizen of nowhere”. She was replaced by Boris Johnson who, as foreign secretary in 2018, infamously said “f*** business.” And then came Ms Truss.

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Economy will be key battlefield in election
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If business leaders are grateful to Messrs Sunak and Hunt, there is also warmth towards Sir Keir Starmer and Ms Reeves for their constructive approach.

Yes, there is some unease about deputy Labour leader Angela Rayner’s proposals to ban zero-hours contracts, end fire and rehire and to give workers full rights and protections from day one of their employment.

But there is a sense that after the leadership of Gordon Brown, Ed Miliband and Jeremy Corbyn, who went into the 2019 election campaign threatening to nationalise much of the energy industry, the water industry and BT’s broadband network, this is the most pro-business Labour leadership since the days of the much-missed Tony Blair.

While big businesses chiefly seek stability and consistency of policy, that is not to say they do not have specific wish-lists of their own.

The big leisure, hospitality and luxury goods companies would like the restoration of VAT-free shopping for international visitors, the loss of which, they argue, has driven business away from the UK to destinations like Paris and Milan.

Most businesses with property interests – which is nearly all of them – would like to see a more coherent planning regime. Housebuilders would like a relaxation of rules requiring a proportion of housing developments are devoted to affordable homes.

Shoplifting scourge

Retailers would like the police to be required to make tackling the scourge of shoplifting a greater priority.

Manufacturers, in particular, would like to see an easing to some trade frictions that have built up since Brexit.

And carmakers – currently under threat of being fined if a certain proportion of their sales are not electric vehicles – would like to see a restoration of government incentives to buy EVs and for the roll-out of EV charging points.

Businesses, it is often pointed out, do not have votes.

But they do create the jobs and wealth on which this country relies. Those hitting the campaign trail over the next six weeks will need no reminding of that.