UK on recession alert amid slump in private sector activity

Britain’s policymakers have been put on recession alert after a closely watched measure of economic health showed the UK gripped by a Europe-wide slump in private sector activity.

In a sign that higher interest rates are now leading to a rapid slowdown in growth as well as choking off inflation, the latest monthly business health checks showed weakness in the UK services and manufacturing sectors and the poorest performance since the lockdown in early 2021.

Problems in Britain were mirrored in the eurozone, where activity has dropped to its lowest level since November 2020. Germany, the single currency’s biggest economy, is being particularly hard hit by the slump in demand for its manufactured goods.

The warnings of problems ahead were flagged up by surveys of purchasing managers, seen as a good guide to future trends in the economy. The surveys use 50 as the cutoff point between growth and contraction.

The UK’s purchasing managers’ index (PMI) conducted by S&P and the Chartered Institute of Procurement and Supply fell from 50.8 in July to 47.9 in August. Service sector activity fell from 51.5 to 48.7, while the manufacturing PMI fell from 45.3 to 42.5.

Chris Williamson, the chief business economist at S&P global market intelligence, 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 heightened 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% over the third quarter so far.”

Williamson said companies were feeling the impact of Britain’s cost of living crisis, lower export demand, higher interest rates and fears about the economic outlook. Firms were seeing their ability to raise prices curbed and inflation was on course to drop to 4% in the months ahead.

“A further pullback in hiring in August, meanwhile, indicates that the labour market is losing steam, which should feed through to lower wage pressures. While a further hike in interest rates in September looks to be on the cards, the August PMI data will add to speculation that rates could soon peak.”

The PMI for the eurozone, conducted by Hamburg Commercial Bank (HCB), showed overall business activity slipping from 48.6 in July to 47.0 in August. The services PMI fell from 50.9 to 48.3, while the manufacturing PMI rose slightly from 42.7 to 43.7.

Cyrus de la Rubia, the chief economist at HCB, said: “The service sector of the eurozone is unfortunately showing signs of turning down to match the poor performance of manufacturing.

“Indeed, service companies reported shrinking activity for the first time since the end of last year, while output in manufacturing dropped again. Considering the PMI figures in our GDP nowcast leads us to the conclusion that the eurozone will shrink by 0.2% in the third quarter.”