UK recession fears intensify after private sector output stumbles

Recession fears have been stoked after a key gauge of the UK’s economic strength showed the private sector contracting faster than expected.

The PMI reading was particularly disappointing for the UK service sector, which includes hospitality operators that have been struggling with cost-of-living and inflationary pressures.

Companies are also downsizing their workforces at the fastest rate since 2009, apart from the extraordinary months of pandemic lockdowns. The latest S&P Global/Cips flash UK composite purchasing managers’ index (PMI) fell to 46.8 in September, compared with 48.6 in August and where any reading below 50 denotes contraction.

It is the preliminary data from a closely-monitored survey which is tracked by the Bank of England when setting interest rates, among other things. The weak reading provides further evidence that borrowing costs may have peaked.

The PMI data suggests that although the manufacturing sector is struggling more than the services sector, the gap narrowed this month. Service providers reported their fastest rate of decline since January 2021.

Chris Williamson, chief business economist at S&P Global Market Intelligence, said: “The disappointing PMI survey results for September mean a recession is looking increasingly likely in the UK. Underscoring the severity of the UK’s deteriorating situation, September’s downturn is the steepest since the height of the global financial crisis in early 2009 barring only the pandemic lockdown months.

“The survey had warned that a revival of growth in the second quarter looked unsustainable, and the third quarter is indeed seeing a mounting toll on the economy from the reality of the increased cost of living and the recent rapid rise in interest rates,” he added.

Economists had expected the private sector to continue to contract but not by this much. An average of forecasts, provided by Pantheon Macroeconomics ahead of the data being released, thought the flash PMI would register 48.7 this month.

Ben Laidler, global markets strategist at trading and investment platform eToro, noted: “The latest forward-looking flash PMIs for the UK and the euro area are both firmly in contractionary territory, highlighting the high recession risks that have put the brakes on interest rate hikes by the European Central Bank and Bank of England. The remarkably resilient UK outlook is now worsening. This is its second month below the break-even 50 level.”

Interest rates UK: Bank of England takes a breather but will November see a rise?