UK economy facing ‘pronounced recession’
The war in the Middle East is “stalling growth” in the UK economy, fresh data has shown, as economists warned that a “pronounced recession” will come if energy prices stay high.
A monthly survey of business activity across the country has suggested that there was a slowdown in output as well as a fall in both domestic and international orders, with the war already taking a toll on the private sector.
S&P Global’s purchasing managers’ index (PMI) showed that businesses suffered from market turmoil in March, with cost pressures rapidly accelerating on the month.
Reacting to the PMI result, Morgan Stanley economist said the UK would face a “pronounced recession” later this year if monetary policy did not ease and commodity prices remained high over the coming months.
Chris Williamson, chief business economist at S&P Global, said the war was “stalling growth while driving inflation sharply higher”.
“Output growth across manufacturing and services has slowed to a crawl as companies blamed lost business directly on the events in the Middle East, whether through heightened risk aversion among customers, surging price pressures, higher interest rates, or via travel and supply chain disruptions,” Williamson said.
The flash PMI remained in positive territory at 51, just above the 50-figure threshold for neutrality in output.
The PMI estimate for manufacturing output skimmed the threshold at 50.1.
Researchers said manufacturers’ input prices index, which measures costs for firms, rose by 14 points in March.
It was the biggest month-on-month increase for the sector since October 1992 after Black Wednesday, the sterling crisis when the government was forced to withdraw currency from the European Exchange Rate Mechanism.
Researchers said the cost pressures on manufacturers were “especially severe”. Problems could be compounded by a fall in demand over the coming months. Company bosses reported a small increase in export orders due to possible stock-piling by customers.
Economists ‘struck’ by bad UK economy results
S&P Global analysts also said respondents in its survey of around 650 services firms and 650 manufacturers reported longer wait times for raw materials as ships were diverted away from the Middle East and had to travel around South Africa.
Service providers also reported a rise in cost pressures while business expectations dropped to its lowest level for nine months.
Capital Economics’ chief UK economist Paul Dales said the flash PMI showed the conflict in the Middle East was “already going a long way to boosting inflation and extinguishing GDP growth – and this is just the start.”
“We are a bit struck by how rapid the moves have been.
“This heightens the Bank of England’s dilemma, although we still think the markets have gone too far by pricing in interest rates rising from 3.75 per cent to 4.25 or 4.5 per cent.”
Rhys Herbert, senior economist at Lloyds, struck a more positive tone as he suggested underlying trends in the UK economy were “holding up”.
“The economy entered March with stronger momentum than it ended last year which should offer some support, but businesses are operating in a challenging environment, and we should not rule out further fluctuations in activity,” Herbert said.