UK still faces “elevated” recession risks, as new orders fall again
Newsflash: The UK economy still faces “elevated” recession risks as the new year approaches, new economic data shows, despite a small pick-up in business growth this month.
The latest poll of purchasing managers at UK firms shows a marginal return to growth in November, after three months of contraction.
The Flash UK PMI composite output index, which tracks activity across the economy, has risen to 50.1 from October’s 48.7. That’s the first time in four months it has been above the 50-point mark showing stagnation.
The services industry returned to growth, while manufacturing shrank at a slower rate, according to data provider S&P Global Insight.
They say:
Relief at the pause in interest rate hikes and a clear slowdown in headline measures of inflation are helping to support business activity, although the latest survey data merely suggests broadly flat UK GDP in the final quarter of 2023.
However, some companies reported that reduced discretionary consumer spending and cost-of-living pressures were hitting sales.
Total new work decreased for the fifth month running.
And in a blow to consumers, firms hiked their prices in November as they passed on strong wage inflation and higher fuel costs.
Those input cost pressures picked up for the first time in four months, leaving to a rise in output costs.
That could alarm the Bank of England, which is already worried that domestic inflation pressures will remain persistent.
Tim Moore, Economics Director at S&P Global Market Intelligence says the UK economy “found its feet again in November”, but warns:
“The survey’s forward-looking indicators suggested that recession risks will likely remain elevated into the New Year, as new orders decreased for the fifth month running amid ongoing reports of subdued sales opportunities.
At the same time, business activity expectations held close to October’s recent low and remained notably soft in comparison to the first half of 2023.
Key events
Paul Swinney, director of Policy and Research at the think tank Centre for Cities, has welcomed the news that Nissan is expected to commit to manufacturing future electric versions of its two best-selling cars in Sunderland.
Swinney said:
“Nissan’s re-commitment to building in Sunderland is a great boost for the city.
“It employs many thousands of people, and it supports the cafes, bars and restaurants through the money that it puts in people’s pockets.
“That said, the city is currently very much more reliant on the automotive sector than most other cities are on their key industries.
“Sunderland needs more than one engine of growth if, should Nissan ever decide to leave, its departure doesn’t have the same impact that the closure of the mines and shipyards had.
“This is why the ongoing changes in the city centre, and the proposed Crown Works film studios by the River Wear are so important to bring not just more jobs, but more higher-paid jobs to the city.”
Over in France, minister are fretting that their credit rating could be downgraded next week.
French finance minister Bruno Le Maire has warned that the country’s borrowing costs would rise if it is downgraded by S&P Global Ratings, which is due to release an update next Friday (1 December).
Le Maire told France Info radio:
“Of course the risk exists, I’m perfectly aware of that, which is why I am intransigent on reducing debt and deficits.
If our rating was downgraded tomorrow, that would mean interest rates would be higher again, we’d borrow at higher cost, and throw billions of euros out the window to pay interest.”
Full story: Nissan to secure UK’s largest car plant with two new EV models
Jasper Jolly
Nissan is expected to announce it will build two new electric models in Sunderland, securing the future of the UK’s largest car factory.
The Japanese carmaker will build replacements for its Qashqai and Juke crossover cars, according to Sky which first reported the news.
Investment in the factory could reach as much as £1bn, with significant government subsidy expected.
It comes after the chancellor, Jeremy Hunt, announced £2bn of government support on Wednesday for investments in zero-emission technology in the UK’s automotive sector. Hunt said in his autumn statement that the measure had been “warmly welcomed by Nissan and Toyota”, both of which have large factories in Britain.
Paul Johnson, head of the Institute for Fiscal Studies, has put his finger on the problem with Jeremy Hunt’s tax cuts – they are effectively paid for by planned real cuts in departmental government spending.
Johnson told a briefing this morning that higher inflation is expected to lift tax receipts in the next few years.
Departmental spending, though, is only forecast to rise a little in the guidance the Treasury gave to the OBR (which is implausible given the demands on government).
Johnson says:
There were two substantial tax cuts – cuts to NICs and making full expensing in corporation tax permanent. Yet the projected tax burden is still set to reach 37.7 per cent of GDP by the end of the forecast period: its highest ever level in the UK.
Effectively those cuts offset the additional revenue generated by that additional inflation.
Put another way, the tax cuts are paid for by planned real cuts in public service spending.
Our Politics Liveblog has all the latest reaction to the autumn statement:
Following this morning’s PMI survey, the EY ITEM Club has predicted UK GDP should avoid a contraction in Q4 as the drag from strike action on public sector output fades.
But the prospect of another flatlining quarter remains, they warn, following stagnation in July-September.
Martin Beck, chief economic advisor to the EY ITEM Club, says:
“November’s flash S&P Global/CIPS survey offered some encouragement, suggesting that private sector activity flatlined rather than declined that month, in contrast to the surveys of late summer and autumn. The composite PMI rose to 50.1 from October’s 48.7. This rise was partly driven by the services sector, with the flash services PMI rising to 50.5 from 49.5. The output balance of the flash manufacturing survey also strengthened to 47.9 from 44.3 in October, albeit remaining in contractionary, sub-50 territory.
“The relationship between the S&P/CIPS surveys and official output data has been weak of late. This is partly because the surveys only cover the private sector, so have been unable to capture the impact of public sector strikes on GDP. Given the number of working days lost to strike action has fallen in Q4 2023 so far, this should mean that GDP growth comes in stronger than signalled by recent PMIs. Still, even with this boost, the EY ITEM Club thinks the economy will struggle to grow in Q4.
Package holiday operator Jet2 has flagged an easing of demand for winter holidays.
Jet2 told shareholders this morning that bookings for this winter have been “a little slower in recent weeks”.
Jet2 also posted a 19% rise in operating profits for the six months to the end of September, despite several challenges.
Jet2 says it remains on track to hit expectations for this financial year. And looking further ahead, bookings and pricing for next summer are “encouraging”, at this early stage.
Jet2’s operations were disrupted by the failure of the UK’s National Air Traffic Services in August, Rhodes wildfires and flooding in Skiathos which resulted in approximately £14.0m of lost profitability.
There is some relief that that UK PMIs show a marginal return to company growth this month.
Matthew Ryan, Head of Market Strategy at global financial services firm Ebury, says the rise in the UK PMI to 50.1 (just above stagnation) is “some rare positive news” on the state of Britain’s economy.
The rebound in services activity, in particular, should somewhat allay concerns over the possibility of a UK recession, and we remain quietly hopeful that a contraction in GDP will be avoided in the final quarter of the year.”
Wall Street bank Citigroup has said it expects the Bank of England to deliver its first rate cut in August next year, later than its earlier expectation of May, as national insurance rate cuts, as well as personal tax cuts, add to inflationary risks, Reuters report.
Economists at Citi said in a note dated November 22 they expect a 100 basis points of cuts through 2024 and that monetary policy must “not only wait for clear evidence that wage inflation has eased, but also that fiscal policy will not use any subsequent space to meaningfully increase the risk.”
“The implication is almost certainly waiting far too long to begin to loosen,” they added.
The pound has inched up 0.2% against the euro this morning to €1.1491, following the PMI surveys from across Europe.
Simon Harvey, head of FX analysis at Monex Europe, says:
November’s flash PMIs once again support our view that the UK economy is merely in a state of stagnation as opposed to outright contraction, like that seen in the eurozone.
In conjunction with structural supply issues which should keep short-term UK rates higher for longer relative to the eurozone, we expect the UK’s better relative growth prospects to support renewed upside in GBPEUR.
This has broadly been on display this morning, with the cross rallying two tenths of a percent as the PMI reports show diverging economic momentum and more credible inflation pressures in the UK, leading UK-eurozone rate spreads to widen.
There are also new recession fears in the eurozone this morning.
The latest eurozone composite PMI output Index remained in contraction territory this month, rising to 47.1 from October’s 46.5.
The survey found that business activity in the euro area continued to fall during November, amid a further solid decline in new orders.
That’s a worse PMI reading than in the UK, of course:
Some unexpected good news on the #UK economy: flash #PMI Composite Output Index recovered to 50.1 in November (from 48.7 in October).
Still only consistent with flat activity, but at least the UK appears to be avoiding the #recession now engulfing the eurozone (PMI just 47.1) 👇 pic.twitter.com/q9Jn7c76sK
— Julian Jessop (@julianHjessop) November 23, 2023
Despite rising more than expected to 50.1 in November, the UK PMI is at a level that “historically, has been consistent with a contraction in real GDP”, says Ashley Webb, UK economist at Capital Economics.
Today’s PMI survey (see previous post) shows that the UK is still not completely out of the “inflationary storm”, warns Dr John Glen, chief economist at CIPS.
Glen adds:
“The overall uptick in activity was driven by the services sector, which benefited from the pause in the hiking of interest rates and improving business conditions. However, challenges persist for UK manufacturing, with subdued demand leading to decreasing production volumes.
Manufacturers will be hoping the permanent extension of the full expensing tax break and the further investment into strategic manufacturing announced in yesterday’s Autumn Statement will give the sector the timely boost it needs.
UK still faces “elevated” recession risks, as new orders fall again
Newsflash: The UK economy still faces “elevated” recession risks as the new year approaches, new economic data shows, despite a small pick-up in business growth this month.
The latest poll of purchasing managers at UK firms shows a marginal return to growth in November, after three months of contraction.
The Flash UK PMI composite output index, which tracks activity across the economy, has risen to 50.1 from October’s 48.7. That’s the first time in four months it has been above the 50-point mark showing stagnation.
The services industry returned to growth, while manufacturing shrank at a slower rate, according to data provider S&P Global Insight.
They say:
Relief at the pause in interest rate hikes and a clear slowdown in headline measures of inflation are helping to support business activity, although the latest survey data merely suggests broadly flat UK GDP in the final quarter of 2023.
However, some companies reported that reduced discretionary consumer spending and cost-of-living pressures were hitting sales.
Total new work decreased for the fifth month running.
And in a blow to consumers, firms hiked their prices in November as they passed on strong wage inflation and higher fuel costs.
Those input cost pressures picked up for the first time in four months, leaving to a rise in output costs.
That could alarm the Bank of England, which is already worried that domestic inflation pressures will remain persistent.
Tim Moore, Economics Director at S&P Global Market Intelligence says the UK economy “found its feet again in November”, but warns:
“The survey’s forward-looking indicators suggested that recession risks will likely remain elevated into the New Year, as new orders decreased for the fifth month running amid ongoing reports of subdued sales opportunities.
At the same time, business activity expectations held close to October’s recent low and remained notably soft in comparison to the first half of 2023.
Resolution Foundation are presenting their autumn statement analysis now – you can watch it here.
In their analysis, they show that the UK’s economic past looks better than expected, but the economic future looks “grim”.
The improved past is because of recent upgrades to historic GDP, which show a stronger recovery from the pandemic than first thought.
But the future looks less rosy, with an economic slowdown delayed rather than cancelled: growth in 2024 is now forecast to be 0.7%, more than halved from the 1.8% forecast in March.
James Smith, research director at the Resolution Foundation, says this is the “weakest growth backdrop to a general election in over three decades”.
Smith adds that you have to go back to 1992 to find an election year “where we were in quite such weak growth”.
Here’s our news story about how Jeremy Hunt’s tax cuts benefit the wealthiest:
