Growing Concerns of Recession as Business Activity Contracts in the UK

24 Aug, 2023

Growing Concerns of Recession as Business Activity Contracts in the UK

Economists have issued warnings about an increased risk of recession following the release of recent data, which reveals an unexpectedly steep decline in business performance across the UK during August. Beyond the impact of the ongoing Covid crisis, the most recent Purchasing Managers' Index (PMI) indicates one of the most severe drops in British business activity since the 2008 banking crisis.

The S&P Global-CIPS Flash UK PMI plunged from 50.8 in July to 47.9 in August, primarily due to reduced orders and elevated borrowing costs for UK companies. This contraction was evident in both the services sector and manufacturing, with both sectors experiencing significant setbacks.

S&P Global Market Intelligence's Chief Business Economist, Chris Williamson, emphasized that the strategy of curbing inflation through increased interest rates is exacting a substantial toll in terms of heightened recession risks. He observed, "An unavoidable economic downturn appears to be on the horizon, given the significant deterioration in the manufacturing sector and the ongoing weakening of the earlier progress seen in the service sector's recovery."

Concurrently, Citi has projected that the UK is likely to enter a recession. The investment bank's forecast indicates that global growth in 2024 will decelerate to less than 2 percent, driven by recessions in both the UK and the US, as well as a slowdown in China.

The PMI data divulges the initial monthly decline since January, falling considerably below the anticipated level. Economists had expected a reading of 50.3, which indicates growth; any reading below 50 signifies contraction. Mr. Williamson suggested that the second quarter's GDP would contract by 0.2 percent, with a potentially bleaker outlook. He underscored, "With the exception of pandemic-induced lockdown months, this represents one of the sharpest contractions since the global financial crisis."

Chief Economist of CIPS, John Glen, commented that the higher interest rates are indeed starting to yield the intended outcome of curbing demand and alleviating inflationary pressures.

Martin Sartorius, Principal Economist at the CBI, highlighted the gloomy outlook for manufacturers, as output volumes experienced their swiftest decline since the onset of the Covid-19 pandemic, coupled with worsening order books.

Meanwhile, efforts are being made to temper expectations of a UK-India post-Brexit trade deal, which could potentially invigorate the British economy, being finalized in the coming autumn. International Trade Secretary Kemi Badenoch, presently in India for discussions with G20 trade and investment ministers, indicated that the possibility of a free trade agreement contradicts pessimistic forecasts. Nonetheless, government sources have downplayed the likelihood of a deal being reached before Rishi Sunak's planned visit to India in September, citing the contentious issue of granting more visas to Indian workers.

Hargreaves Lansdown's Head of Money and Markets, Susannah Streeter, cautioned that the pursuit of such a trade agreement might remain frustratingly elusive unless the Tory government adopts a more flexible stance on immigration. A spokesperson from the Department for Business and Trade stated, "While we cannot provide commentary on ongoing negotiations, our focus remains on achieving a deal that is equitable, balanced, and ultimately serves the best interests of the British populace and the economy."

During Boris Johnson's tenure as Prime Minister, the government had originally aimed to finalize a deal by Diwali in October 2022, a target that ultimately went unmet.