Factory slump and cost-of-living squeeze puts UK economy on course to shrink

[beijingwalker]

Factory slump and cost-of-living squeeze puts UK economy on course to shrink​

By David Milliken
August 23, 20237:46 PM GMT+8

A man works in the Farrat factory in Altrincham, Britain, May 12, 2023. REUTERS/Carl Recine/File Photo

LONDON, Aug 23 (Reuters) - Britain's economy looks on course to shrink during the current quarter and risks falling into a recession, as a survey on Wednesday showed a slump in factory output and broader weakness in the face of higher interest rates.

The S&P Global/CIPS composite Purchasing Managers' Index (PMI) tumbled to 47.9 in August from 50.8 in July, according to a preliminary estimate which was below all forecasts in a Reuters poll of economists.

The reading was the lowest since January 2021, when Britain was in a COVID-19 lockdown, and the first fall below the 50 level which divides growth from contraction since January this year.

Britain's economy - struggling with high inflation as well as the after-effects of the coronavirus pandemic and Brexit - last shrank in the third quarter of 2022, when many businesses closed to mark Queen Elizabeth's funeral. Since then it has defied widespread forecasts of recession but has grown slowly.

Chris Williamson, chief business economist at S&P Global Market Intelligence, said the PMI pointed to a 0.2% fall in overall economic output during the three months to the end of September.

"The fight against inflation is carrying a heavy cost in terms of heightened recession risks," he said.

The eurozone composite PMI also came in below all economists' forecasts at 47.0, down from 48.6 in July.

Sterling fell against the dollar and the euro and British government bond yields headed for their biggest daily fall in more than a month as investors scaled back expectations for further interest rate rises.

The Bank of England has raised rates 14 times since December 2021, taking them to a 15-year high of 5.25%. Financial markets still expect a further rate rise to 5.5% in September, but now expect rates to peak at 5.75% rather than 6%.

"The PMIs are unquestionably bad," said James Smith, an economist at ING. However, after a strong finish to the second quarter and other data showing a recovery in car production, he said he did not expect contraction in the third quarter.

Nonetheless, the figures did highlight the risk that the BoE was too focused on wage inflation, which often lags other economic developments, he said.

EASING PRICE PRESSURES?​

British inflation has been slow to fall since it hit a 41-year high of 11.1% last year, and at 6.8% in July was the highest of any major economy.

S&P's Williamson said he expected it to drop to 4% "in the months ahead". The BoE said earlier this month it only saw inflation falling below 4% from the second quarter of 2024.

The PMI survey recorded the slowest growth in output prices since February 2021.

Services prices, which the BoE has been watching closely, grew at the slowest pace since April 2021.

Manufacturers - who make up 10% of Britain's economy - reported the biggest fall in output prices since February 2016, echoing wider weakness in the sector.

The manufacturing PMI dropped from 45.3 to 42.5 in August, its lowest since May 2020, while the services sector fell from 51.5 to 48.7, matching January's two-year low.

"Companies are reporting reduced orders for goods and services as demand is increasingly hit by the cost-of-living crisis, higher interest rates, export losses and concerns about the economic outlook," Williamson said.

Customers reduced stocks of manufactured goods at the fastest rate since March 2009, during the depths of the global financial crisis.

Manufacturers said this fall appeared to be an attempt to reduce the need for working capital at a time of rising interest rates. They hoped this would be a one-off move as there was a limit to how much customers could reduce stock levels.

Services companies said households had stretched finances, which was only partly offset by strong tourism demand.

Overall business optimism for the year ahead dropped to an eight-month low but was broadly in line with its pre-pandemic average.

Factory slump and cost-of-living squeeze puts UK economy on course to shrink

Britain's economy looks on course to shrink during the current quarter and risks falling into a recession, as a survey on Wednesday showed a slump in factory output and broader weakness in the face of higher interest rates.

www.reuters.com

 

[beijingwalker]

Recession warning as UK economy gauge suffers worst slump since 2021 lockdown​

• The UK’s private sector suffered a downturn in August, new PMI data shows
• Private sector businesses see poorest outcome since January 2021, data reveals

By JANE DENTON

UPDATED: 16:12 BST, 23 August 2023

The UK’s private sector suffered a downturn in August on the back of lower new orders and higher borrowing costs, ratcheting concerns the economy could enter a recession.

The downturn on the closely watched gauge of the UK economy marks the worst turn since January 2021 when the UK was hit by the harsh winter lockdown during the Covid-19 pandemic.

The closely followed S&P Global/CIPS flash UK purchasing managers’ index (PMI) fell to 47.9 in August, down from 50.8 in July.

It represented the first monthly decline since January as firms were struck hard by recent hikes to interest rates, which have risen to a 15-year high of 5.25 per cent.

However, some economists said the downturn may not be as bad as this preliminary poll suggests.

Any reading above 50 is considered to show the sector is growing, while anything below represents a contraction.

The figure was below expectations, following a consensus among economists of a 50.3 reading for the month.

The survey pointed towards shrinking activity in both the manufacturing and services sectors.

The services industry had been a particular driver of growth in recent months, but reported its joint-fastest slump in output for 31 months.

The flash manufacturing industry reading was 42.5, the weakest for 39 months, due to a 'sharp and accelerated fall in production volumes'.

Across all industries, new orders fell for the second consecutive month as surveyed firms 'cited a reluctance to spend among clients in the wake of higher interest rates and stretched disposable household incomes'.

The latest survey added: 'Inflationary pressures continued to moderate in August, with input costs rising at the slowest pace for two-and-a-half years.

'That said, there were again many reports of persistently strong wage pressures. Average prices charged by UK private sector companies also increased at the softest rate since February 2021.'

Overall, business optimism for the year ahead dropped to an eight-month low but was broadly in line with its pre-pandemic average.

The pound slipped in value against the dollar in response to the data. The FTSE 100 was up 0.72 per cent or 52.12 points to 7,322.88 this afternoon, while the FTSE 250 index was up 0.97 per cent or 174.48 points to 18,198.74.

The Bank of England, led by governor Andrew Bailey, has raised interest rates 14 times since December 2021, taking them to a 15-year high of 5.25 per cent. Financial markets broadly expect a further rate rise to 5.5 per cent in September, and see rates peaking at 6 per cent later this year.

UK inflation has been slow to fall since it hit a 41-year high of 11.1 per cent last year, and at 6.8 per cent in July was the highest of any major economy.

Some experts have warned that today's data could show an increased risk of recession due to efforts to tackle rampant inflation by increasing interest rates.

Chris Williamson, chief business economist at S&P Global Market Intelligence, said: 'The early PMI survey for August suggests that inflation should moderate further in the months ahead, but also indicates that the fight against inflation is carrying a heavy cost in terms of heightened recession risks.

'A renewed contraction of the economy already looks inevitable, as an increasingly severe manufacturing downturn is accompanied by a further faltering of the service sector’s spring revival.

'The survey is indicative of GDP declining by 0.2 per cent over the third quarter so far.'

A technical recession is typically defined as two consecutive quarters of decline.

Martin Beck, chief economic advisor to the EY Item Club, said: 'This combination of a slowdown in both activity and inflation should give the Bank of England food for thought in advance of its next interest rate decision in September and suggests an increase is no longer a certainty.

'On balance, the EY Item Club thinks the latest survey findings may not be enough to deter the Bank of England from raising interest rates again, given recent developments in pay and services inflation.

'But they do reinforce the expectation that a rate rise next month, if it happens, will likely be the last in the current cycle.'

John Glen, chief economist of the CIPS, said: 'This reduction in activity has provided UK supply chains with much-needed respite after the instability of the last two years.

'High interest rates are starting to have their intended effect of dampening demand and reducing inflationary pressures, leading to moderated input costs and reduced raw material prices for manufacturers.'

The UK's economy, struggling with high inflation as well as the after-effects of the pandemic, last shrank in the third quarter of 2022, when many businesses closed to mark Queen Elizabeth's funeral. Since then it has defied widespread forecasts of recession but has grown slowly.

Recession warning as UK PMIs suffer worst slump since 2021 lockdown

The closely followed S&P Global/CIPS flash UK purchasing managers' index (PMI) fell to 47.9 in August, down from 50.8 in July.

www.thisismoney.co.uk

 

[aziqbal]

meanwhile Chinese fleeing to South Korea on jet ski while millions try and get to UK illegally each year

https://www.washingtonpost.com/world/2023/08/23/chinese-man-korea-jet-ski-kwon-pyong/