UK economy goes into contraction in Aug, prospects darken: IHS Markit

Posting 49.6, down from 52.1 in July, the index hit its lowest since the COVID-19 lockdowns of February 2021.

The manufacturing decline is gathering pace to a worrying degree. The severity of the manufacturing decline is such that, barring pandemic lockdown months, August's falling production was the steepest seen since the height of the global financial crisis in March 2009.

Although the survey data are currently consistent with the economy contracting at a modest quarterly rate of 0.1 per cent, deteriorating trends in order books and future expectations suggest the risk of a recession has risen, IHS Markit said in a release.

However, the survey data also suggest 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.

While the composite new orders index also slipped fractionally below the 50 no-change mark to signal falling demand for the first time since the early-2021 lockdowns, led by an accelerating rate of decline in new orders for goods and a marked slowing in demand for services, new export sales fared even worse.

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.

Confidence about the future has meanwhile slipped back to a level that matched June's 25-month low. 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 widely cited as causes for concern, the press release noted.

Input costs continued to increase sharply at the aggregate level, though the rate of increase cooled to an 11-month low. Overall output price inflation was, however, little changed compared to July, dropping only slightly to point to persistent elevated CPI readings in the months ahead.

The latest data, therefore, reveal a situation whereby the Bank of England is aggressively hiking interest rates 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, the press release noted.

Fortunately, inflationary pressures—not withstanding upcoming energy price hikes—are showing signs of moderating, which may fuel speculation that policy may not need to be tightened much further if the cooling core price trend persists.

ALCHEMPro News Desk (DS)