UK economy stagnates amid 'depressed' sentiment and indicating recession

The UK's economic downturn worsened in October, with growth in the private sector slowing to a 21-month low, according to new figures.

Business activity across the services sector, which includes hospitality like restaurants and pubs, declined for the first time in 20 months (file image). Picture: Scott Louden.

Output declined for the third month running following a period of political turbulence that has dragged on the financial markets. The influential S&P Global/Chartered Institute of Procurement & Supply (Cips) flash UK composite purchasing managers index (PMI) showed a reading of 47.2 last month, below September's 49.1 reading.

It also fell short of the 48 market consensus, although analysts at Pantheon Economics had predicted a more accurate PMI of 47 reflecting political and economic uncertainty taking its toll on private-sector businesses. Any score below 50 is considered a contraction for the economy, while anything above is seen as growth.

The index showed a steep fall in output as manufacturers continued to grapple with supply shortages and a slowdown in demand. Meanwhile, business activity across the services sector, which includes restaurants and pubs, declined for the first time in 20 months and at the fastest pace since January 2021. The survey asked thousands of businesses about their trading each month and is closely watched around the world.

Squeezed household budgets, recession concerns, and delayed business investment decisions due to political uncertainty were all cited as factors leading to lower output this month. The Cips said the decline was "no great surprise" given that businesses are worried about politics, rising interest rates, and historically high costs. As a result, optimism levels amongst manufacturers and the service sector slumped to a two-and-a-half-year low.

Chris Williamson, chief business economist at S&P Global Market Intelligence, said that other than during the Covid lockdowns, the index was the lowest since March 2009. He added: "October's flash PMI data showed the pace of economic decline gathering momentum after the recent political and financial market upheavals. The heightened political and economic uncertainty has caused business activity to fall at a rate not seen since the global financial crisis in 2009 if pandemic lockdown months are excluded.

"Gross domestic product therefore looks certain to fall in the fourth quarter after a likely third quarter-contraction, meaning the UK is in recession. Business confidence has, meanwhile, collapsed, sliding to a level rarely seen before in 25 years of survey history, meaning companies are becoming increasingly nervous about the outlook."

Recruiting was hailed as a relatively "bright spot" in October as employment numbers were boosted by firms' post-pandemic recovery plans. Nonetheless, the rate of private-sector job-creation was the slowest for 20 months, the survey revealed.

Martin Beck, chief economic advisor to the EY Item Club, said: “Intense cost-of-living pressures, political uncertainty and depressed sentiment among respondents to the monthly S&P Global/Cips activity surveys meant substantial falls in October's flash PMIs were no surprise. The flash services index of 47.5, down from September's 50.0, passed an unwelcome milestone, coming in below the 50 'no-change' mark for the first time since February 2021.”

He added that more evidence of economic weakness should help reduce the appetite by the Bank of England’s monetary policy committee (MPC) to raise interest rates “substantially” on November 3. He said the EY Item Club now expects the MPC to raise rates by 75 basis points next month, which would take it to 3 per cent.