The UK is facing the steepest economic downturn since the global financial crisis, if pandemic lockdowns are excluded, according to the results of a recent survey of UK private firms.
Britain's large services industry flipped into contraction territory, joining the manufacturing industry, the 'flash' S&P Global/CIPS UK purchasing managers index (PMI) survey showed - though some economists said the outturn may not be as bad as this preliminary poll suggests.
New orders received by UK private sector firms fell to a nine-month low as "sluggish" domestic economic conditions and higher interest rates led to caution among clients, the report 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," said Chris Williamson, chief business economist at S&P Global Market Intelligence.
He said the UK economy "has entered a significant downturn", and excluding pandemic lockdown months, "one of the steepest contractions since the global financial crisis", with the surveys signalling that UK GDP will decline by 0.2% over the third quarter so far and fall more steeply.
"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."
Inflation easing, wage growth too
Inflationary pressures continued to moderate in August, the survey showed, with input costs rising at the slowest pace for two-and-a-half years, leading to average prices charged by UK private sector companies increasing at the softest rate since early 2021.
Persistently strong wage pressures continue, backing up last week's ONS survey for June.
"Although cost pressures remain elevated, thanks mainly to rising wages, the deteriorating demand environment is curbing companies' pricing power," said Williamson.
A fall in CPI to around 4% from the recent 6.8% is indicated by the survey, he added, while a pull-back in hiring in August indicates that the labour market is "losing steam, which should feed through to lower wage pressures".
The services PMI, based on questionnaires received in the first two weeks of August, fell to a seven-month low of 48.7 from 51.5% in July, below the 51 expected. A PMI reading above 50 indicates an improvement compared to the previous month, and below 50 a decrease.
Meanwhile, the manufacturing PMI declined to a 31-month low of 42.5 from 45.3 in July, lower than the 45 predicted.
There are Bank of England rate implications, economists say
Williamson speculated that another hike in interest rates from the Bank of England's Monetary Policy Committee (MPC) still looks "on the cards" for September but the PMI data "will add to speculation that rates could soon peak".
Following the release the pound tumbled 0.45% versus the dollar to 1.267 and the FTSE climbed higher, due to the implications that worse economic conditions could precipitate a sooner interest rate pause from the MPC.
But economist Martin Beck of the EY ITEM Club said he doesn’t think the economy "isn’t quite that weak" but felt the implications for interest rates remained.
In practice, Beck felt a continuation of the sluggish growth of recent quarters is "likely for the near future", but the softer activity and easing inflationary pressures "mean a rise in interest rates in September is no longer looking so certain".
If there is a BoE rate rise next month, he feels it "will be the last in the current cycle".
He noted that evidence suggests that the PMI survey "can be influenced by the sentiment of respondents, as well as actual movements in output, a factor which may be at play this time, given a recent run of downbeat headlines about rising mortgage rates".
Gabriella Dickens, senior UK economist at Pantheon Macroeconomics, said the survey "suggests the MPC are nearing the point where they will halt their tightening cycle".
She noted that current activity is being supported by companies working through order backlogs and predicted that the PMI "will come under additional pressure over the coming months once these backlogs have been depleted".
She was also slightly more upbeat on quarter-on-quarter GDP than the survey suggests, in part due to the suspension of industrial activity among several unions.