Yahoo Finance UK recession fears rise after sharp fall in private sector output
Bank of England's drive to tame inflation with interest rate rises slows economic activity
The Bank of England’s (BoE) drive to tame inflation with interest rate rises is depressing public sector output and stoking fears of a recession, according to the latest data.
At 47.9 in August, down from 50.8 in July, the headline seasonally adjusted S&P Global/CIPS Flash UK Composite Output Index posted below the neutral 50.0 threshold for the first time since January.
Chris Williamson, 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."
It comes as inflationary pressures continued to moderate in August, with input costs rising at the slowest pace for two-and-half years.
Read more: LIVE: FTSE rises as traders abandon major China stocks in record sell-off
But S&P Global noted persistently strong wage pressures were weighing on firms and pointed to "a faster fall in new orders as sluggish domestic economic conditions and higher borrowing costs led to caution among clients".
"Average prices charged by UK private sector companies also increased at the softest rate since February 2021. Survey respondents suggested that they had adjusted their pricing strategies in response to weaker demand and falling input cost inflation," S&P Global said.
Lower levels of activity were recorded in both the manufacturing and service sectors during August.
The services PMI business activity index fell to 48.7 in August from 51.5 in July, while the manufacturing PMI declined to 42.5 from 45.3, hitting its lowest level in 39 months. Any figure below 50 signifies contraction.
"The downturn in service sector output was only marginal, but nonetheless the joint-fastest for 31 months (equalling that seen in January)," S&P Global said.
"Manufacturers meanwhile experienced a sharp and accelerated fall in production volumes, which extended the current period of decline to six months."
Read more: Interest rate hikes slowing UK inflation, says Bank of England's Huw Pill
New orders across the UK private sector economy declined for a second consecutive month.
“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.
Higher rates dampening demand
Matthew Ryan, head of market strategy at financial services firm Ebury, said the PMI data was evidence that higher rates are dampening consumer demand, as higher mortgage payments squeeze household purchasing power.
“Sterling has come off sharply so far today, as investors bet that the slowdown in the UK economy will elicit a more cautious approach from the Bank of England during upcoming MPC meetings," he said.
Read more: Bank of England raises UK interest rates to new 15-year high
“We still see at least a couple more 25 basis point hikes as likely before year-end, although we may begin to see a more vocal dovish dissent among the committee, as policymakers balance high core inflation with an economy verging on stagnation.”
BoE rate increase uncertainty
However, Martin Beck, chief economic advisor to the EY ITEM Club said in a note to clients that the combination of a slowdown in both activity and inflation suggests a rate increase is no longer a certainty.
“On balance, the EY ITEM Club thinks the latest survey findings may not be enough to deter the Bank of England from raising interest rates again, given recent developments in pay and services inflation,” he said.
“But they do reinforce the EY ITEM Club’s expectation that a rate rise next month, if it happens, will likely be the last in the current cycle.”
Watch: S&P bank downgrades, Nvidia earnings hype
Download the Yahoo Finance app, available for Apple and Android.
