Recession fears grew again in the UK as a key business survey last week painted a grim picture of the strains in the economy. The preliminary version of the closely watched S&P Global/CIPS private sector output index fell far more steeply than expected by forecasters from 50.8 in July to 47.9 in August.
It was the first reading under 50 – which indicates contrasting output – since January, ending a six-month period of expansion as the economy shrugged off slump fears earlier in the year. It was also the fastest rate of decline since January 2021 when the nation was in the grip of the second pandemic lockdown.
However, this latest data is the strongest signal yet that the crushing weight of 14 successive interest rate rises is causing major stress for businesses. Financial markets immediately discounted the likelihood of another major interest rate rise in September with a half-point hike by the Bank of England (BoE) now seen as impossible.
The manufacturing sector has been hardest hit with its PMI index falling from 45.3 to a 39-month low of 42.5. The services index dropped from 51.7 to a seven-month low of 48.7.
According to the Confederation of British Industry’s (CBI) industrial trends survey, the balance of factories reporting a rise in output versus a fall slumped to -19 per cent, compared to plus 3 per cent in the three months to July.
Martin Sartorius, the CBI’s principal economist, said: “With output volumes contracting at their fastest pace since the Covid-19 pandemic and order books deteriorating, the survey makes for gloomy reading for manufacturers.” Most economists believe the UK will narrowly avoid recession this year but the survey, nevertheless, points to a rough road ahead. Sartorius argues that the weak outlook shows the need for the government to “double-down on delivering sustainable growth” by offering incentives to boost green investment and encourage decarbonisation.
Chief business economist at S&P Global Market Intelligence, Chris Williamson, said: “The early PMI survey for August suggests that inflation should moderate further in the months ahead, but also indicates that the fight against inflation is carrying a heavy cost in terms of increased recession risks.
“A renewed contraction of the economy already looks inevitable, as an increasingly severe manufacturing downturn is accompanied by a further faltering of the service sector’s spring revival. The survey is indicative of GDP declining by 0.2 per cent over the third quarter so far.” The survey said manufacturers saw a sharp and accelerated fall in production volumes, which extended the current period of decline to six months. Meanwhile the fall in new orders across the private sector was the fastest since November 2022, with lower levels of customer demand now seen in the service and manufacturing sectors.
The worrying figures come less than a week after grim official retail data for July showing that the sale in stores were badly hit by the wet weather conditions – which then extended into August as well.
GDP only grew by 0.2 per cent in the second quarter, although it was a relatively perky 0.5 per cent in June. However, this is likely to have been flattered by a transfer of economic activity from May when there was an extra Bank Holiday to celebrate the King’s coronation.
Chief UK economist at forecaster Capital Economics, Paul Dales 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 per cent to 5.50 per cent in September, but it will encourage it that higher rates are working.” (The writer is our foreign correspondent based in the UK)
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