Risk of recession rises amid weakened output 

S&P Global has warned that incoming prime minister Liz Truss is inheriting an economy that faces a heightened risk of recession, following a “severe and accelerated” drop in UK manufacturing output as well as a “near-stalled” service sector.

Chris Williamson, chief business economist at S&P Global Market Intelligence said the incoming prime minister “will not only be dealing with an economy that is facing a heightened risk of recession, but also a deteriorating labour market and persistent elevated price pressures linked to the soaring cost of energy”. 

It comes as the S&P Global/CIPS UK Composite PMI fell below the “crucial” 50.0 no-change mark during August for the first time in 18 months.

Although S&P Global said its survey data was consistent with the economy contracting at a “modest” quarterly rate of 0.1%, deteriorating trends in order books and future expectations “suggest the risk of a recession has risen”. 

It added that the manufacturing decline is “gathering pace to a worrying degree”, and that barring lockdown, the “severity” of the manufacturing decline was the steepest seen since the height of the global financial crisis in March 2009.

Meanwhile, the latest PMI survey found that UK private sector business activity fell for the first time in a year-and-a-half in August, as the “increasingly severe” downturn in manufacturing was accompanied by a “near-stalling” of the services sector. 

Posting 49.6, down from 52.1 in July, the S&P Global/CIPS UK Composite PMI hit its lowest since the pandemic lockdowns of February 2021.

Demand for consumer-facing services such as restaurants, hotels, travel and other recreational activities was found to be “collapsing under the weight of the cost-of-living crisis”, with demand for business services coming under pressure amid concerns over rising costs and the “darkening economic outlook”. 

According to S&P Global, financial services firms are also reporting subdued trading amid the recent hikes in interest rates, “adding to an increasingly broad-based malaise across the economy”.

While the composite new orders index fell below the 50.0 no-change mark to signal falling demand for the first time since the early-2021 lockdowns, new export sales “fared even worse”, according to the survey. Overseas sales of goods and services declined to the greatest degree since January 2021 as companies blamed “weakening global demand, high prices and Brexit related complications”.

S&P Global said that confidence about the future has also slipped back to a level that matched June’s 25-month low. It found that companies’ concerns were focused on the cost-of-living crisis, with businesses worried about their own escalating costs and the adverse spending impact of inflation on both households and businesses. Political uncertainty, rising interest rates and Brexit were also cited as causes for concern.

S&P Global concluded: “The latest data therefore reveal a situation whereby the Bank of England is aggressively hiking interest rates (the last meeting saw an unusually hawkish 50bp hike) at a time of contracting economic activity. It is clear that the desire to bring inflation expectations down is coming at an increasingly high economic cost in terms of growth.”