UK on recession alert amid slump in private sector activity

London: 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 leading to a rapid slowdown in growth and choking inflation, the latest monthly business health checks showed weakness in the UK services and manufacturing sectors and the poorest performance since the Covid 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 US has so far performed more strongly than Europe but even the world’s biggest economy is also showing signs of strain. Activity slowed to near-stagnation level in August and was at its lowest in six months.

The warnings of problems ahead were flagged up by a series of surveys of purchasing managers, seen as a reliable 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.

Jennifer McKeown, the chief global economist at the Capital Economics consultancy, said: “August’s flash PMIs support our view that the eurozone and UK will slip into recession in the third quarter and imply that the US is now barely growing.

“And with output prices still easing gradually, the surveys strongly suggest that we are at or close to the peak in monetary tightening cycles.”

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%, from 6.8%, in the months ahead.