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UK economic activity has fallen at the fastest pace since January 2021, according to a closely watched survey that suggests the chances of a recession have increased.
With service sector activity weakening and a contraction in manufacturing, the S&P Global/Cips purchasing managers’ index fell to 46.8 in September, down from 48.6 in August, and the lowest in 32 months. The pound dropped 0.5 per cent against the dollar to $1.2234, a six-month low.
The PMI figures were worse than the 48.7 forecast by economists polled by Reuters and well below 50, which indicates a majority of businesses reporting a contraction in activity. The survey also showed an abrupt deterioration in private sector employment numbers.
Chris Williamson, chief business economist at S&P Global Market Intelligence, said the disappointing PMI flash UK composite output for September meant “a recession is looking increasingly likely in the UK”.
He added that Friday’s figures were consistent with gross domestic product contracting at a quarterly rate of more than 0.4 per cent, with a broad-based downturn gathering momentum. However, some economists warn that the PMI indices are not an exact predictor of output.
S&P said the poor PMI reading, which the Bank of England saw in advance, contributed to policymakers’ knife-edge decision to hold benchmark interest rates at 5.25 per cent this week. The PMIs were mentioned 13 times in the Monetary Policy Committee’s minutes this week.
The UK economy expanded during the first two quarters of 2023, but Williamson said there was now “a mounting toll on the economy from the reality of the increased cost of living and the recent rapid rise in interest rates”.
The PMI indices were based on a survey conducted between September 12 and 20 that asked private companies whether their output, prices and employment had expanded or declined compared with the previous month.
The release on Friday showed that the index for services dropped to 47.2, from 49.5 the month before. The index for manufacturing edged up from 44.1 in August to 44.6 in September but remained in negative territory.
Samuel Tombs, UK economist at Pantheon Macroeconomics, said he was “sceptical” of the PMIs’ “signal that economic activity is declining quickly, given that real wages have picked up and consumers’ confidence has improved materially over recent months”.
Separate data also released on Friday showed that retail sales rebounded by 0.4 per cent in August and that GfK consumer confidence index rose to the highest level since January 2022 in September, though confidence still remained low by historical standards.
Ashley Webb, at the consultancy Capital Economics, said that while PMIs were “rarely an accurate predictor of GDP growth”, the recent trend supported the view that GDP would contract during the third quarter.
After hiring expanded for five consecutive months, businesses cut jobs in September. Excluding the period of the coronavirus pandemic, the rate of job losses was the highest since October 2009, according to the report.
September’s PMI figures also suggested the downward trend in inflation continued this month. The index recorded the largest monthly fall in input price inflation so far in 2023, despite widespread reports citing pressure on costs from higher fuel bills.
A combination of weak demand and lower cost inflation contributed to the slowest increase in average prices charged by private sector companies since February 2021.
The deterioration in the UK PMI was in contrast with the marginal uptick for the eurozone where the PMI index rose to 47.1, from 46.7 last month.
