UK private sector business activity contracted in August, in a sign of consumer demand being hit by the intensifying cost of living crisis.
The S&P Global/Cips UK purchasing manager index for manufacturing and services dropped to 49.6 in August from 52.1 in July and below a flash reading of 50.9.
This was the first time the reading fell below 50 — the threshold between contraction and expansion — since January 2021, when the country was in a Covid-19 lockdown.
With inflation at a 40-year-high, the figures come as rising energy and food prices are putting pressure on households’ finances, while soaring costs add to business challenges.
Chris Williamson, chief business economist at S&P Global Market Intelligence, said the figures showed that incoming prime minister Liz Truss “will be dealing with an economy that is facing a heightened risk of recession, a deteriorating labour market and persistent elevated price pressures linked to the soaring cost of energy”.
Williamson said demand for consumer-facing services, such as restaurants, hotels, travel and other recreational activities, was “collapsing under the weight of the cost of living crisis”.
He added that demand for business services was also coming under pressure amid concerns over rising costs and the darkening economic outlook.
The final reading for the services sector was 50.9 in August, down from initial estimates of 52.5 and the lowest since February 2021. The corresponding reading for manufacturing, published last week, was 47.3. That indicated the worst contraction since May 2020, when strict Covid curbs were in place.
Samuel Tombs, chief UK economist at the consultancy Pantheon Macroeconomics, said: “The latest PMI data signal that the economy is on the brink of a recession.”
Among services providers, operating costs rose sharply, according to the figures, and there was evidence of higher wages and salaries being paid.
The growth in price setting “will worry the [Bank of England’s] Monetary Policy Committee more than the stalled recovery”, added Tombs.
Output price inflation also accelerated compared with July, marking almost two years of uninterrupted growing output charges. The results chime with the Bank of England Decision Maker survey released last week, which showed that momentum was still building in price and wage expectations, even if demand was weakening.
With price pressures building, markets are pricing in a 75 per cent probability of a 75 basis points increase in the policy interest rate at the MPC’s next meeting on September 15. They expect interest rates to rise to 4 per cent by February next year from the current 1.75 per cent.
John Glen, Cips’ chief economist, said that while port disruption, Brexit paperwork and shortages were all contributing to high inflation, the services sector was “relatively powerless” faced with ever-increasing energy bills.
“Services businesses will have their eyes firmly on the new prime minister this week as they hope for a policy-driven solution to rocketing costs,” he added.
Source: Economy - ft.com
