UK recession fears mount as private sector contracts in August

·Reporter
·3 min read
UK recession fears grow as the economy battles several headwinds amid soaring inflation and uncertainty. Photo: Reuters/Hannah McKay
UK recession fears grow as the economy battles several headwinds amid soaring inflation and uncertainty. Photo: Hannah McKay/Reuters

Things are looking gloomier for the UK economy as recession fears mount after the private sector shrank in August as the energy crisis spirals.

The S&P Global Services/CIPS purchasing managers index (PMI) for services and manufacturing dropped to 49.6 in August, from 52.1 in July and below a flash reading of 50.9.

That marked the first fall below 50 — the threshold between contraction and expansion — since January last year, when firms were suffering from continuous COVID lockdowns.

Read more: UK business confidence plummets amid rising inflation

According to the survey, demand for consumer-facing services such as restaurants, hotels, travel and other recreational activities is "collapsing", as the cost of living crisis drives consumers to reign in spending.

Meanwhile, business confidence has slumped, with companies reporting a drop in new orders, including the biggest drop in export demand since January last year.

Chris Williamson, chief business economist at S&P Global Market Intelligence, said: "UK private sector business activity fell for the first time in a year-and-a-half in August as an increasingly severe downturn in manufacturing was accompanied by a near stalling of the vast services sector.

"Demand for consumer facing services such as restaurants, hotels, travel and other recreational activities is collapsing under the weight of the cost of living crisis, with demand for business services also coming under pressure amid concerns over rising costs and the darkening economic outlook."

Chart: S&P Global/CIPS
Chart: S&P Global/CIPS

The report suggests the UK economy is slipping into a recession, something that the Bank of England and other economic surveys expect to happen by year end.

"Elevated price pressures" remain a worry for service sector firms, notably for energy, as well as the "prospect of higher interest rates and possible recession", it stated.

Williamson added that the deteriorating trends in order books suggest the incoming prime minister "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".

Read more: If Liz Truss becomes prime minister this is how it will affect your taxes, bills and savings

The UK service sector grew at the slowest rate in 18 months, with PMI dropping to 50.9 in August from 52.6 the previous month.

While sales increased in the services industry, economic uncertainty, lower consumer confidence and worries over surging inflation and high energy bills, dampened the mood.

"Input costs continued to rise at a rapid rate this month with services businesses left with no choice but to pass the pain onto clients and consumers," Dr John Glen, chief economist at CIPS said.

"While port disruption, Brexit paperwork and shortages all continue to play a role in driving inflation, the sector is relatively powerless in the face of ever-increasing energy bills."

The correspondent reading for manufacturing was 46.

Watch: What is a recession and how do we spot one?