UK Economy Shrinks in August, Outlook Darkens: IHS Markit

The UK Purchasing Managers’ Index (PMI) from the S&P Global-Chartered Institute of Procurement & Supply (CIPS) fell below the crucial 50 flat mark in August for the first time in 18 months, signaling a slowdown in business activity in the UK private sector. A sharp and accelerating decline in UK manufacturing output was accompanied by a near-zero service sector.

At 49.6 versus 52.1 in July, the index hit its lowest level since the COVID-19 lockdowns in February 2021.

The decline in production is accelerating at an alarming rate. Such is the severity of the output drop that, barring months of the pandemic lockdown, the August output drop was the steepest since the peak of the global financial crisis in March 2009.

The S&P Global-Chartered Institute of Procurement & Supply UK Composite Purchasing Managers’ Index (PMI) fell below the crucial 50 flat mark in August for the first time in 18 months, signaling a slowdown in business activity in the UK private sector. A sharp and accelerating decline in UK manufacturing output was accompanied by a near-zero service sector.

Although survey data currently suggests the economy is shrinking at a modest quarterly rate of 0.1 percent, deteriorating trends in order books and future expectations suggest the risk of a recession has increased, IHS Markit said in a release.

However, the survey data also suggest that the new prime minister will not only deal with an economy at increased risk of recession, but also with a deteriorating labor market and persistently elevated price pressures related to rising energy costs.

While the composite new orders index also slipped marginally below the unchanged 50 mark to signal falling demand for the first time since lockdowns in early 2021, led by an accelerating decline in new goods orders and a sharp slowdown in demand for services, new export sales fared even worse.

Sales of goods and services abroad fell the most since January 2021 as companies blamed weaker global demand, high prices and Brexit-related complications.

Confidence about the future has meanwhile slipped back down to levels in line with the 25-month low in June. Business concerns centered on the cost of living crisis, with businesses concerned about their own escalating costs and the adverse spending impact of inflation on households and businesses.

Political uncertainty, rising interest rates and Brexit were also frequently cited as causes for concern, the press release said.

Input costs continued to rise sharply at the aggregate level, although the rate of increase slowed to an 11-month low. However, headline producer price inflation was little changed compared to July, declining only slightly, pointing to continued elevated CPI readings in the coming months.

The latest data therefore shows a situation where the Bank of England is aggressively raising interest rates at a time of contracting economic activity. It is clear that the desire to lower inflation expectations comes with ever-increasing economic costs of growth, the press release states.

Fortunately, inflationary pressures are showing signs of moderating, energy price hikes notwithstanding, which could fuel speculation that monetary policy may not need to be tightened much further if the trend of cooling core prices continues.

Fiber2Fashion Newsdesk (DS)

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