UK economy stumbles behind Euro peers as risk of recession gathers pace

The UK economy is falling further behind its international rivals and experts, according to a closely watched survey.

The survey by economists has revealed Britain’s services industry, which generates about £2 in every £3 in the country, is shrinking at the fastest pace in two years.

S&P Global and the Chartered Institute of Procurement and Supply’s (CIPS) flash purchasing managers’ index (PMI) fell quicker than forecast to 48 points this month from 49.9 in December.

City traders expected the survey to come in at 49.5.

S&P Global and the CIPS’s composite UK PMI, which combines output in the services and manufacturing industries, dropped to 47.8, also a two year low. Output among factories was better than expected, but separate numbers from the Confederation of British Industry covering activity in the sector today came in at a softer net minus 17.

The steep drop means the UK’s services PMI is far below the 50 point threshold that separates growth and contraction, signalling the country’s descent into a much touted recession is gathering pace.

Britain’s “recession is deepening,” Thomas Pugh, an economist at consultancy RSM, said, adding he thinks the “economy is now in a recession that will last until Q3 2023 and result in a drop in GDP of around two per cent”.

Others agreed with that assessment. 

Gabriella Dickens, senior UK economist at consultancy Pantheon Macroeconomics, said: “GDP still is on a downward trend, as real incomes continue to fall” due to inflation racing past wage growth and the government watering down cost of living support.”

Separate PMIs covering respective countries in the eurozone also indicate the UK is lagging behind its continental peers.

Germany’s services PMI jumped back above 50, meaning output is growing, as did France’s manufacturing survey.

Britain’s relatively worse economic performance suggests the International Monetary Fund will confirm it will suffer the toughest recession of rich nations in its fresh outlook report released later this month.

Confidence in the underlying strength of the UK economy has strengthened recently due to a better than expected set of GDP figures for November that revealed the economy grew 0.1 per cent instead of an expected 0.2 per cent contraction.

Inflation has also dropped for two months in a row for the first time since the early months of the Covid-19 crisis, now down to 10.5 per cent, but far above its recent trend and more than five times the Bank of England’s two per cent target.

However, today’s PMI numbers have renewed worries about the economy’s health.

“While the economy may have managed to narrowly avoid a recession in 2022, it seems very likely that it will slip into recession in 2023,” Olivia Cross, assistant economist at Capital Economics, said.

Latest forecasts from the Bank of England project the economy will slip into the longest recession in a century. 

But, a big reduction in international gas prices – now below Russia-Ukraine war levels – will ease inflationary pressure on household and business finances, meaning governor Andrew Bailey and co are likely to upgrade their GDP projections at next Thursday’s rate decision.

Dickens also noted the softening in activity opens the door to the Bank to stop hiking rates soon.

Bailey and co are trying to tame inflation by sucking demand out of the UK economy by making it more expensive for companies and households to borrow and more attractive to save. 

The monetary policy committee has kicked interest rates higher nine times in a row to a post financial crisis high of 3.5 per cent and are expected to bump them another 50 basis points next Thursday.