Sharecast - The S&P Global/CIPS flash composite output index declined to 47.9 from 50.8 in August, coming in below the 50.0 mark that separates contraction from expansion for the first time since January and marking a 31-month low.
Private sector firms put this down to a faster fall in new orders as sluggish domestic economic conditions and higher borrowing costs made clients cautious.
The services PMI business activity index fell to 48.7 in August from 51.5 in July, while the manufacturing PMI declined to 42.5 from 45.3, hitting its lowest level in 39 months.
John Glen, CIPS chief economist, said: "High interest rates continue to cast a shadow over the UK economy, creating a lull in new orders, stunting output, and ensuring prospects for the private sector remain uncertain.
"This reduction in activity has provided UK supply chains with much-needed respite after the instability of the last two years. High interest rates are starting to have their intended effect of dampening demand and reducing inflationary pressures, leading to moderated input costs and reduced raw material prices for manufacturers. Businesses who had built up stock as a safety net against disruption have now reduced their inventories and created more balanced and efficient supply chains as a result.
"The hope is that more predictable supply chains will help to stabilise the economy and support an eventual rebound in new orders. However, the question remains as to how long elevated borrowing costs will limit demand."
After the release, sterling was trading down 0.4% against the dollar at 1.2685.
Paul Dales, chief UK economist at Capital Economics, said: "The fall in the activity PMI to below the boom-bust level of 50.0 in August and the further drop in the prices balances probably won’t prevent the Bank of England from raising interest rates from 5.25% to 5.50% in September, but it will encourage it that higher rates are working."
