UK economic activity shrinks as recession fears mount

UK economic activity has shrunk for a fourth consecutive month as new orders fell at the fastest pace in almost two years, pointing to a deepening recession that is forecast to last more than a year.

The S&P Global/Cips UK flash composite purchasing managers’ index, which tracks monthly changes in manufacturing and services activity, was broadly unchanged at 48.3 in November, compared with 48.2 in October.

November’s reading, though above the 47.5 forecast in a Reuters poll, was the fourth successive figure below the 50 mark, which indicates a majority of businesses reporting a contraction.

“A further steep fall in business activity in November adds to growing signs that the UK is in recession,” said Chris Williamson, S&P Global Market Intelligence’s chief business economist.

He added that the PMIs reading was consistent with gross domestic product falling by 0.4 per cent in the final quarter of the year. That would mark the second consecutive quarterly decline, which defines a technical recession.

The Office for Budget Responsibility, the independent fiscal watchdog, last week forecast that the UK economy would be in recession until the third quarter of 2023. The OECD, a club of mostly rich nations, on Tuesday said it expected the UK to be the worst performer in the G20 next year bar Russia.

The PMI survey, based on data collected between November 11 and 21, showed new orders had fallen at the fastest pace since December 2021, as squeezed client budgets continued to affect demand in the manufacturing and service sectors.

These forward-looking PMI indicators suggested that “the downturn will deepen as we head into the new year”, said Williamson.

Gabriella Dickens, senior UK economist at the consultancy Pantheon Macroeconomics, said the recession would probably “deepen early next year”, as households’ real disposable incomes are further hit next April by the government reducing subsidies for energy bills.

Manufacturing production continued to decline at a faster pace than service sector activity, the survey showed. But the downturn in manufacturing was the least marked since July, as a number of companies reported fewer supply shortage issues.

Price pressures also eased in November, partly reflecting weakening demand. Williamson said this suggested that the Bank of England may start to raise interest rates less aggressively in the coming months.

Markets expect the BoE’s Monetary Policy Committee to increase rates by 50 basis points at its next meeting in December, down from the 75 basis points rise of November 3.

Rishi Sunak’s appointment as prime minister resulted in improved business confidence, according to the survey, but the mood of managers remained among the gloomiest seen during the past 25 years.

Panellists attributed the pessimism to numerous headwinds, including the cost of living crisis, the Ukraine war, rising export challenges, higher borrowing costs and fiscal tightening.

Excluding the pandemic period, the PMI index for manufacturing export orders fell at the fastest pace since 2009. Many survey respondents cited Brexit-related constraints on export demand, as well as the unfavourable global economic backdrop.

John Glen, Cips chief economist, said: “The Covid veil, now almost completely lifted, has revealed the challenges still faced by exporters struggling with customs and paperwork challenges and other Brexit constraints putting off overseas customers.”