As expected, the European Central Bank (ECB) pulled the trigger last week and raised interest rates, as inflation reached twice the target level. The Bank of England's Monetary Policy Committee (MPC) meets this week, but evidence of a sharp slowdown across all sectors of British industry suggest that UK policymakers won't follow suit.

Activity in the UK's manufacturing, services and construction sectors slumped in June. The manufacturing purchasing managers' index (PMI), a key leading indicator of activity, reported a dismal combination of the slowest growth in output and new orders for almost a decade, alongside new record highs in inflation. Ironically, manufacturing was one sector of British industry that appeared to have been weathering the slowdown comparatively well.

The UK services sector mirrored the pattern of slowing activity and rising price pressures evident in the manufacturing survey, with its PMI slumping to 47, the lowest outturn since October 2001. Although technically in contraction territory (i.e. below 50), the current services PMI reading has, historically, been associated with modest services output growth of 1½%-1¾% y/y - around half its long-run average. But on any yardstick, this amounts to a significant slowdown. The main limitation of the services PMI survey is that it only stretches back as far as 1996 - so there are no data covering full-blown recessionary conditions.

Data from Nationwide confirmed that UK house prices continue to slide - prices were down 6.3% y/y in June from 4.4% the previous month. This is further bad news for construction, where activity is already declining sharply (the construction PMI fell to 38.8 - well below the 50 no-change level). A weaker housing market is already providing less support to consumer spending. Housing equity withdrawal (HEW) fell by a third in Q1 2008 to just over £5bn - almost two-thirds lower than the £14bn recorded in Q1. In terms of the rate debate, last week's UK data compound the difficult judgment facing the MPC and, consequently, are probably broadly neutral. We don't expect a rate hike on Thursday, but there will no doubt be intense debate within the Committee.

The ECB stopped barking and bit last week, lifting its key lending rate by 25 basis points to 4.25% as inflation in the area rose to 4% in June. However, ECB President Trichet signalled that further rate hikes weren't imminent, as the ECB looks to balance the growth/inflation trade-off. He also acknowledged that the latest hike would impact some countries harder than others. Varying economic performance in the region is already evident, as the slowdown is already much more pronounced in some economies than others. The June PMIs indicated that Germany is the only "big four" Eurozone economy where manufacturing and service sectors are both expanding. PMIs are now well below the crucial 50 level in Spain and in Ireland - where GDP growth was negative in Q1.

Last week's US data were again consistent with a weak economy, rather than one that is in severe recession. Employment fell by 62,000, the sixth straight monthly decline. Employment declined by an average of 62,000 a month in Q2 down, less than the 82,000 average monthly fall in Q1 - an encouraging sign, but hardly a definitive step toward recovery. Indeed, the larger question is whether the US labour market is poised to take another tumble in the months ahead. In this respect, the employment components of the manufacturing and services ISM surveys (the equivalent to our PMI indicators) were less encouraging. Company's hiring intentions weakened in both sectors, suggesting that the labour market could deteriorate further in the months ahead.

The crude oil rally continues. Prices passed the next milestone on this Bull Run, topping $145 per barrel last week. Record high prices will add to already intense inflationary pressures around the world. Following similar measures in India and China, Pakistan is starting to phase out fuel subsidies from next year as the portion of the budget deficit attributable to the subsidies reached 6.5% of GDP. Bangladesh also raised fuel prices by between 37.5% and 67%.

Such moves will have a measurable effect on consumption, but the bulk of demand reduction is so far coming from developed economies. Petrol consumption in the US was down 1.7% last month compared to one year ago, the first time consumption has fallen in seventeen years. Vehicle miles driven are lower as well, and sales of thirsty SUVs are all but collapsing, foreshadowing further demand destruction. Europe has seen even sharper cutbacks in fuel consumption. These are tough times for the global economy.