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UK recession risk grows as higher interest rates weigh on firms

<span>Photograph: Grant Rooney/Alamy</span>
Photograph: Grant Rooney/Alamy

Britain’s economy is at growing risk of recession, with industry figures showing the sharpest monthly fall in private sector activity, outside of the Covid pandemic, since the financial crisis.

In a sign that higher interest rates and the cost of living crisis are combining to depress consumer demand, the latest snapshot from S&P Global and the Chartered Institute of Procurement and Supply (Cips) showed a steep drop in the UK’s dominant service sector and manufacturing output in September.

Aside from pandemic disruptions to the economy, the latest decrease in the purchasing managers’ index (PMI) was the steepest since March 2009.

Related: Judging by the state of the UK economy, the Bank is done with interest rate hikes

On Thursday, the Bank of England halted its most aggressive round of interest rate increases in decades on Thursday amid growing concerns over the economy, holding borrowing costs at 5.25% after 14 previous rises. It said it was given early sight of the S&P Global/Cips data before its decision.

On Friday, Mike Bell of the US investment firm JP Morgan Asset Management said: “This morning’s weak UK PMI business survey explains why the Bank didn’t raise rates yesterday.

“It’s clear from the weak survey data that the effect of the prior interest rate hikes is starting to bite. The weakness in the key service sector, along with the ongoing weakness in manufacturing, was probably what sealed the deal for the Bank.”

Total new work in the private sector fell for the third month in a row, with firms warning that cost of living pressures and higher borrowing costs, alongside cutbacks in the real estate and construction sectors, were weighing on activity.

The S&P Global/Cips UK PMI composite output index fell from 48.6 in August to 46.8 in September. A reading above 50 separates growth from contraction.

Chris Williamson, the chief business economist at S&P Global market intelligence, said the reading was consistent with the economy shrinking at a quarterly rate of about 0.4%. Two consecutive quarters of decline are regarded as the technical definition of a recession.

Williamson said: “The disappointing PMI survey results for September mean a recession is looking increasingly likely in the UK. Underscoring the severity of the UK’s deteriorating situation, September’s downturn is the steepest since the height of the global financial crisis in early 2009, barring only the pandemic lockdown months.”

Separate figures for retail sales in Great Britain showed some recovery in consumer spending in August, after a washout for retailers in one of the wettest Julys on record.

Sales volumes rose by 0.4% on the month after a sharp 1.1% fall in July, the Office for National Statistics said. Economists polled by Reuters had forecast a slightly stronger rebound to 0.5%.

Sales in food stores drove the recovery, with growth in the volume of sales of 1.2% after a fall of 2.6% in July, when supermarkets reported that wet weather had reduced clothing sales. Sales volumes at non-food stores grew by 0.6%in August, after a fall of 1.2% in July when poor weather reduced footfall.

Sandra Horsfield of the investment bank Investec said: “The trend in total retail spending volumes has been broadly sideways. The economy is entering more troubled waters and a [relatively mild and short-lived] recession is likely to ensue this winter.”