UK private sector firms suffered their first contraction in seven months, revealing the growing economic toll of higher interest rates and the squeeze on households.
(Bloomberg) — UK private sector firms suffered their first contraction in seven months, revealing the growing economic toll of higher interest rates and the squeeze on households.
S&P Global said its composite purchasing managers’ index slipped from a score of 50.8 to 47.9 in August, the lowest in 31 months. The scale of the downturn will come as a surprise to economists, who had expected only a modest slowdown with activity remaining above the 50 level dividing expansion from contraction.
Companies blamed the biggest decline in new business since November on the impact of rocketing borrowing costs as the Bank of England struggles to tame inflation. S&P said both services and manufacturing contracted in August, indicating a 0.2% decline in GDP in the third quarter so far.
The figures will strengthen the case for the BOE to call time on its most aggressive monetary tightening in over three decades. While money markets are currently pricing in a peak of around 6%, the BOE did not predict a third-quarter contraction in its latest forecasts. Instead, it expected a 0.4% expansion as the economy bounced back from days lost to the coronation of King Charles III and labor strikes.
“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,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.
“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.”
While the PMIs historically have been a guide for how official figures on economic growth will turn out months later, they wrongly pointed to a sharp downturn for six months through January. The UK defied forecasts from many economists and the Bank of England for a lengthy recession, delivering sputtering and stagnant growth for most of the past two years.
The darkening economic backdrop piles further pressure on Prime Minister Rishi Sunak, whose Conservative Party trails far behind the Labour opposition in opinion polls ahead of a general election widely expected next year.
Until now the dominant services sector has been the most resilient part of the economy, helping to offset a shrinking manufacturing sector. Now, however, both are in negative territory, with the contraction in services this month the joint fastest since the start of 2021 when the economy was in lockdown. Manufacturing activity slumped to a 39-month low.
S&P said prices charged by firms rising at the slowest pace since February 2021, a “rate commensurate with consumer price inflation cooling to 4% in the months ahead,” Williamson said. Private-sector employment rose at the slowest pace since March, which should ease wage pressures that remain “persistently strong.”
“Companies are reporting reduced orders for goods and services as demand is increasingly hit by the cost-of-living crisis, higher interest rates, export losses and concerns about the economic outlook,” said Williamson.
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