UK recession risk increases as services activity slumps

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UK economic activity has fallen at the fastest pace since January 2021, according to a closely watched survey that suggests the chances of a recession have increased.

With service sector activity weakening, the S&P Global/Cips purchasing managers’ index fell to 46.8 in September, down from 48.6 in August, and the lowest in 32 months. The pound dropped 0.5 per cent against the dollar to $1.2234, a six-month low.

The PMI figures were worse than the 48.7 forecast by economists polled by Reuters and well below 50, which indicates a majority of businesses reporting a contraction in activity.

The survey also showed an abrupt deterioration in private sector employment numbers, which had been growing for the previous five months.

Excluding the period of the pandemic, the rate of job losses was the highest since October 2009.

Some economists warn that the PMI indices are not an exact predictor of output.

But Chris Williamson, chief business economist at S&P Global Market Intelligence, said the disappointing PMI flash UK composite output for September meant “a recession is looking increasingly likely in the UK”.

He added that Friday’s figures were consistent with gross domestic product contracting at a quarterly rate of more than 0.4 per cent, with a broad-based downturn gathering momentum.

S&P said that the poor PMI reading, which the Bank of England saw in advance, contributed to policymakers’ knife-edge decision to hold benchmark interest rates at 5.25 per cent this week. 

The UK economy expanded during the first two quarters of 2023, but Williamson said there was now “a mounting toll on the economy from the reality of the increased cost of living and the recent rapid rise in interest rates”.

The index for services dropped to 47.2 from 49.5 the month before, while the index for manufacturing edged up to 44.6 in September from 44.1 in August.

However, Samuel Tombs, UK economist at Pantheon Macroeconomics, said he was sceptical of the PMIs’ “signal that economic activity is declining quickly, given that real wages have picked up and consumers’ confidence has improved materially over recent months”.

He added: “PMIs have a track record of signalling downturns that have not materialised.”

Other experts anticipate an economic downturn.

Ashley Webb, at the consultancy Capital Economics, said that, while PMIs were “rarely an accurate predictor of GDP growth”, the recent trend supported the view that GDP would contract during the third quarter.