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The S&P Global/CIPS UK Composite PMI fell below the crucial
50.0 no-change mark during August for the first time in 18 months.
A severe and accelerated drop in UK manufacturing output was joined
by a near-stalled service sector.
Although the survey data are currently consistent with the
economy contracting at a modest quarterly rate of 0.1%,
deteriorating trends in order books and future expectations suggest
the risk of a recession has risen.
However, the survey data also suggest the incoming prime
minister will not only be dealing with an economy that is facing a
heightened risk of recession, but also a deteriorating labour
market and persistent elevated price pressures linked to the
soaring cost of energy.
UK business activity contracts in August
The latest PMI survey data show UK private sector business
activity falling for the first time in a year-and-a-half in August
as an increasingly severe downturn in manufacturing was accompanied
by a near-stalling of the vast services sector. Posting 49.6, down
from 52.1 in July, the S&P Global/CIPS UK Composite PMI hit its
lowest since the COVID-19 lockdowns of February 2021.
Although merely consistent with GDP contracting at a quarterly
rate of 0.1%, the manufacturing decline is gathering pace to a
worrying degree. The severity of the manufacturing decline is such
that, barring pandemic lockdown months, August's falling production
was the steepest seen since the height of the global financial
crisis in March 2009.
Demand for consumer-facing services such as restaurants, hotels,
travel and other recreational activities is meanwhile collapsing
under the weight of the cost-of-living crisis, with demand for
business services also coming under pressure amid concerns over
rising costs and the darkening economic outlook. Financial services
firms are meanwhile reporting subdued trading amid the recent hikes
in interest rates, adding to an increasingly broad-based malaise
across the economy.
While the composite new orders index also slipped fractionally
below the 50.0 no-change mark to signal falling demand for the
first time since the early-2021 lockdowns, led by an accelerating
rate of decline in new orders for goods and a marked slowing in
demand for services, new export sales fared even worse. Overseas
sales of goods and services declined to the greatest degree since
January 2021 as companies blamed weakening global demand, high
prices and Brexit related complications.
Gloomy prospects
Confidence about the future has meanwhile slipped back to a
level that matched June's 25-month low. Companies' concerns were
focused on the cost-of-living crisis, with businesses worried about
their own escalating costs and the adverse spending impact of
inflation on both households and businesses. Political uncertainty,
rising interest rates and Brexit were also widely cited as causes
for concern.
Both the survey's new orders index and business expectations
index are now at levels which have generally only been seen in the
survey's history prior to periods of economic contraction, and both
point to the downturn gaining momentum in September.
Cost pressures ease but remain stubbornly
elevated
Input costs continued to increase sharply at the aggregate
level, though the rate of increase cooled to an 11-month low.
Overall output price inflation was, however, little changed
compared to July, dropping only slightly to point to persistent
elevated CPI readings in the months ahead.
Waning jobs market
Jobs growth is meanwhile starting to weaken, with August seeing
the smallest increase in hiring since March 2021. As hiring tends
to lag changes in order books, the recent slump in demand alongside
surging energy prices points to a growing reticence to employ staff
in coming months.
Hiking into a downturn
The latest data therefore reveal a situation whereby the Bank of
England is aggressively hiking interest rates (the last meeting saw
an unusually hawkish 50bp hike) at a time of contracting economic
activity. It is clear that the desire to bring inflation
expectations down is coming at an
increasingly high economic cost in terms of growth. Fortunately,
inflationary pressures - not withstanding upcoming energy price
hikes - are showing signs of moderating, which may fuel speculation
that policy may not need to be tightened much further if the
cooling core price trend persists.
Chris Williamson, Chief Business Economist, S&P
Global Market Intelligence
Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.
