Growth in UK economic activity has slowed more than expected to an 18-month low as manufacturing shrank on weaker demand, supply shortages and labour, according to a closely watched survey.
The S&P/Cips global flash UK composite purchasing managers’ index, a measure of private sector activity, dropped to 50.9 in August from 52.1 last month. That is the lowest reading since February 2021, when the country was in a pandemic-related lockdown.
The reading, based on data collected between August 12 and 19, was weaker than the 51.1 forecast by economists polled by Reuters and was only marginally above the 50 mark, which indicates a majority of businesses reporting a month-on-month expansion.
Annabel Fiddes, economics associate director at S&P Global Market Intelligence, said: “The UK private sector moved closer to stagnation in August, as mild growth of activity across the service sector only just offset a deepening downturn at manufacturers.”
The PMI index for manufacturing collapsed from 51.1 in July to 46 in August, the first reading indicating a contraction since May 2020, when the UK economy was under a stringent lockdown.
Reduced customer demand, the delayed delivery of goods and materials and labour shortages all weighed on performance, according to panel members.
A number of companies said increased economic uncertainty and high costs had weighed on market confidence and sales. The PMI sub-index for factories’ orders fell sharply, indicating the third consecutive month of contraction.
Consumer demand is limited by historically high UK inflation, which rose to 10.1 per cent in July. Citigroup, the bank, on Monday forecast that inflation would exceed 18 per cent in January next year, as energy prices continue to soar.
Paul Dales, chief UK economist at Capital Economics, a consultancy, said “we suspect the composite PMI will be ringing the recession alarm bell before long”, adding that he expected a recession in the third quarter after official data showed that the economy contracted in the second quarter.
The Bank of England this month forecast a prolonged recession that would leave the economy smaller by Q3 2025 than it was before the pandemic.
However, Dales said that, in view of soaring inflation, the BoE would have little choice but to continue lifting interest rates from 1.75 per cent now to 3 per cent.
Simon Harvey, head of FX analysis at Monex Europe, a foreign exchange company, said that with the PMI sub-index for inflation still pointing to prices rising, albeit at a slower pace than in previous months, Tuesday’s data “confirms our view that the BoE will likely conduct a second 50 basis points hike at their September meeting”.
That view is supported by recent further surges in European wholesale gas prices, which suggest the cost pressure could intensify in the coming months.
The downturn in the manufacturing sector was confirmed by the first fall in output since February 2021 in the three months to this August, the CBI, an employers’ organisation, reported on Tuesday.
However, the UK composite PMI was stronger than in the eurozone, where the index dropped to 49.2, thanks to the resilience of the British services sector.
The UK services PMI remained largely stable at 52.5, with Gabriella Dickens, senior UK economist at Pantheon Macroeconomics, saying this could reflect “the additional support to incomes provided by the government in July”.
But overall, the survey showed that the UK’s economic recovery from the hit of the pandemic has stalled.
John Glen, Cips chief economist, said disruptions to supply chains from the Ukraine war, soaring inflation, higher interest rates and now industrial action at ports were all “keeping private sector business owners awake at night”.
Are we heading towards a global recession? Our economics editor Chris Giles and US economics editor Colby Smith discussed this and how different countries are likely to react in our latest IG Live. Watch it here.