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UK private sector slumps as cost of living crisis hits customer demand

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·Business Reporter, Yahoo Finance UK
·3-min read
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The month-on-month loss of momentum in the UK in May was the fourth-largest on record, amid the cost of living crisis. Photo: Ben Stansall/AFP via Getty
The month-on-month loss of momentum in the UK in May was the fourth-largest on record amid the cost of living crisis. Photo: Ben Stansall/AFP via Getty

Businesses in the UK private sector reported a sharp slowdown in activity in May as the current cost of living crisis, and the war in Ukraine, hit customer demand.

According to the S&P Global/CIPS composite, the purchasing managers index (PMI) came in at 51.8 during the month, down from 58.2 in April.

Although any reading above 50 indicates growth, it was the slowest rise in business activity since the COVID lockdowns in March 2021, thanks to soaring cost pressures.

The month-on-month loss of momentum in May was also the fourth-largest on record, the data showed, exceeding anything seen prior to the coronavirus pandemic.

The report showed the fastest rise in operating expenses since the index began in January 1998, led by a rapid acceleration in input cost inflation across the service economy.

UK PMI for May. Chart: S&P Global, CIPS, ONS
UK PMI for May. Chart: S&P Global, CIPS, ONS

“Concerns about squeezed margins and weaker order books resulted in a considerable drop in business expectations for the year ahead,” it said.

This signalled the lowest private sector growth projections since May 2020.

Service providers saw the greatest loss of momentum in May at 51.8, down from 58.9 the month before. Survey respondents said that economic and geopolitical uncertainty had contributed to a slowdown in client demand.

However, many businesses in the travel, leisure and events sector still commented on strong growth conditions due to a rapid recovery from pandemic restrictions.

In the manufacturing sector, output fell from 54.3 to 51.8, with the latest increase in production volumes the joint-weakest since October 2021.

Read more: FTSE 100 falls as traders eye UK borrowing and Davos conference

Export sales were also a drag on new work. Manufacturers reported the steepest drop in export orders since June 2020.

A number of goods producers cited Brexit-related trade frictions as the main factor contributing to lower export sales in May, especially in relation to new customs rules, extra documentation requirements and other complexities with EU trade.

The survey showed that there was a rise in employment numbers at private sector firms in May, thanks to efforts to boost business capacity and catch up on unfinished work.

However, the rate of job creation eased slightly since April and was the least marked for 13 months. Some businesses noted that a desire to reduce costs had led to the non-replacement of voluntary leavers.

“The UK PMI survey data signal a severe slowing in the rate of economic growth in May, with forward-looking indicators hinting that worse is to come,” Chris Williamson, chief business economist at S&P Global, said.

“Meanwhile, the inflation picture has worsened as the rate of increase of companies' costs hit yet another all-time high.”

Read more: Is the UK heading into a recession?

He added: “There are some signs that the rate of inflation could soon peak, with companies reporting price resistance from customers, and it is likely that the slowing in demand will help pull prices down in coming months.

“However, the latest data indicate a heightened risk of the economy falling into recession as the Bank of England fights to control inflation.”

The pound fell sharply against the dollar (GBPUSD=X) on the back of the news, fuelling fears of a possible UK recession, and that the Bank of England (BoE) will likely face pressure to act.

Sterling slumped 0.7% against the dollar to $1.2483.

Watch: How does inflation affect interest rates?

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