LONDON (Reuters) – Britain’s economy could slide into recession this quarter as industrial production slumped in August, the S&P Global Monthly Survey of Purchasing Managers released on Thursday showed.
The S&P Global/CIPS Purchasing Managers’ Index (PMI) fell to 47.9 in August, from 50.8 in July, according to a preliminary estimate, below expectations of 50.3 in a Reuters poll of economists.
The index is at its lowest since January 2021, when Britain was on lockdown for health reasons, and is declining below the 50 threshold, which separates growth from contraction, for the first time since January.
Britain’s economy, struggling with high inflation, the aftermath of the coronavirus pandemic and that of Brexit, last contracted in the third quarter of 2022, when many businesses closed on the occasion of the funeral of Queen Elizabeth. Since then, growth has progressed only slowly.
Chris Williamson, chief economist at S&P Global Market Intelligence, said the PMI index suggested a 0.2% drop in overall economic output in the three months to the end of September.
“The fight against inflation comes at the cost of increased risks of recession,” he said.
The Bank of England (BOE) has raised interest rates 14 times since December 2021, taking them to 5.25%, their highest level in 15 years. Markets expect a further rate hike to 5.5% in September and expect rates to peak at 6% later in the year.
The decline in UK inflation has been slow since its 41-year peak of 11.1% reached last year. At 6.8% in July, UK inflation is the highest of all major economies.
However, Chris Williamson said he expected it to fall to 4% “in the coming months”. The BOE said earlier this month that it only expected inflation to fall below 4% from the second quarter of 2024.
The PMI survey recorded the weakest growth in producer prices since February 2021. Manufacturers – who make up 10% of the UK economy – reported the biggest fall in producer prices since February 2016.
The manufacturing PMI fell from 45.3 to 42.5 in August, its lowest level since May 2020, while the services sector fell from 51.5 to 48.7.
“Businesses are reporting reduced orders for goods and services as demand is increasingly hit by the cost of living crisis, rising interest rates, export losses and concerns about the outlook. economic”, explained Chris Williamson.
Customers have been drawing down inventories of manufactured goods at the fastest rate since March 2009, trying to reduce working capital needs at a time of rising interest rates, manufacturers said.
The companies surveyed, however, hope that this is a one-off measure, as inventory levels by customers cannot be reduced endlessly.
Overall business optimism for the year ahead fell to an eight-month low, but remained broadly in line with its pre-pandemic average.
(Report David Milliken, French version Corentin Chapron, edited by Kate Entringer)
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