UK business activity contracts for third consecutive month

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UK business activity shrank for the third consecutive month in October, according to a closely watched survey, indicating that high interest rates and prices are continuing to weigh on the economy.

The S&P Global/Cips Flash UK composite purchasing managers’ output index, a measure of the health of the manufacturing and services sector, marginally increased to 48.6 in October from 48.5 the previous month.

The reading remained below the 50 mark, indicating that a majority of businesses continued to report a contraction in their output.

“The UK economy continued to skirt with recession in October, as the increased cost of living, higher interest rates and falling exports were widely blamed on a third month of falling output,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.

The PMI indices are closely watched as a near real-time gauge of the economy as official statistics lag by several months. The PMIs suggested that high interest rates are hitting demand, employment and confidence across the economy.

Ruth Gregory, economist at Capital Economics, said the readings supported “our view that a mild recession is under way and that the Bank of England has finished hiking interest rates”.

The BoE is widely expected to leave interest rates unchanged at 5.25 per cent when it meets on November 2.

However, economists warned that the PMIs are not a perfect predictor of economic growth. The flash estimates for September were later heavily revised. October’s preliminary results may be “taken with a pinch of salt”, said Sandra Horsfield, economist at Investec.

The flash UK estimates, based on a survey conducted between October 12 and 20, showed that the services sector index ticked down to 49.2 in October from 49.3 in the previous month, indicating a modest decline in output. The final reading will be released at the end of the month. 

The manufacturing index improved to 45.2 from 44.3 in the previous month but marked eight consecutive months in negative territory — the longest such period since the financial crisis.

Forward looking indicators, such as new orders, deteriorated in October with panellists citing caution among corporate clients, alongside stretched household budgets due to cost of living pressures. Business outlook for the year ahead also dropped to its lowest level since December 2022.

Business lamented weaker exports, especially in the manufacturing sector, while companies reduced their job count for the second consecutive month.

Some economists expect high inflation to come down this year, boosting real incomes and spending in the final quarter. But Thomas Pugh, economist at RSM UK, said: “Growth is likely to remain marginal over the next year, meaning that it wouldn’t take much of a deterioration, in sentiment or economic conditions, to tip the UK into a recession.”