Britain’s new prime minister is facing a “heightened risk of recession” following new figures signalling the private sector contracted in August after activity slumped in the services sector.
The widely-followed S&P Global/CIPS UK services PMI survey suggested the all-important services sector only just eked out growth last month, with a worse-than-expected reading of 50.9, down from 52.6 in July and the slowest pace of expansion for a year-and-a-half.
A backlog of work and a boost from the Commonwealth Games in Birmingham narrowly kept the sector in positive territory, according to the report.
This left the composite reading for private sector activity – taking into account manufacturing and services survey data – at 49.6 in August, down from 52.1 in July and the first drop below the crucial 50 no-change mark in 18 months.
A reading below 50 shows contraction.
Experts warned that the latest figures deal the incoming leader of the Conservative Party an early blow, by showing a mounting threat of imminent recession, as defined by two quarters in a row of falling output, due to the cost-of-living crisis.
Demand for consumer-facing services such as restaurants, hotels, travel and other recreational activities is collapsing under the weight of the cost-of-living crisis
Chris Williamson, S&P Global Market Intelligence
Chris Williamson, chief business economist at survey compiler S&P Global Market Intelligence, said the PMI data points to a “modest” contraction in the economy in the current third quarter of 0.1%.
But this comes after the economy contracted by 0.1% in the second quarter and therefore a fall in gross domestic product (GDP) in the three months to September would tip the UK into recession.
Mr Williamson said: “Demand for consumer-facing services such as restaurants, hotels, travel and other recreational activities is 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.”
He added: “Jobs growth is already starting to weaken and, with hiring tending 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.
“Although the survey data are currently consistent with the economy contracting at a modest quarterly rate of 0.1%, deteriorating trends in order books suggest the incoming prime minister will be dealing with an economy that is facing a heightened risk of recession, a deteriorating labour market and persistent elevated price pressures linked to the soaring cost of energy.”
The latest data follows an increasingly dire PMI reading for manufacturers last week, suggesting a contraction in the sector for the first time since March 2020.
In the services survey, firms were said to be reporting slumping confidence in the marketplace and pressure on budgets due to soaring inflation and energy prices.
The latest PMI data signal that the economy is on the brink of a recession
Samuel Tombs, Pantheon Macroeconomics
Companies across the sector reported higher operating costs, led by energy, but also due to supply difficulties with some goods, higher import prices and increased staff wages.
They passed on cost pressures to customers as a result, with the data showing the 20th month in a row of rising output charges.
In a rare bright spot, employment remained resilient across the sector as firms continued to plug staffing gaps, although growth in hiring levels eased back to the slowest pace since March 2021.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “The latest PMI data signal that the economy is on the brink of a recession.”
He added that signs that firms have continued to increase their prices and that employees are demanding higher wages will see the Bank of England act with further hefty interest rate rises over the next few months to cool rampant inflation.
“Accordingly, we expect the MPC (Monetary Policy Committee) to raise bank rate by 50 basis points at both its September and November meetings, despite the developing recession,” he said.