The authors of a closely-watched report on economic activity have warned of a growing threat of recession, citing twin pressures from inflation and interest rate hikes designed to choke the pace of price rises.
The S&P Global/CIPS composite Purchasing Managers’ Index, which measures elements of the services and manufacturing sectors, showed private sector growth at its weakest for six months in July.
Chris Williamson, chief business economist at S&P Global, said of the survey’s findings: “Rising interest rates and the higher cost of living appear to be taking an increased toll on households, dampening a post-pandemic rebound in spending on leisure activities.
“Meanwhile, manufacturers are cutting production in response to a worryingly severe downturn in orders, both from domestic and export markets,” he added.
Its measures had services output slowing this month but remaining above the bar for expansion while manufacturing was in the red, and at its weakest level since May 2020, as new orders slumped.
The report’s findings will, perversely, make for positive reading at the Bank of England as it seeks a slump in demand to help bring inflation down.
It has imposed 13 consecutive interest rate hikes to date in a bid to keep a lid on elements it can control.
The so-called secondary effects it is worried about include wage growth, which is running at a joint-record rate.
The reasons for that include the granting of wage rises to keep pace with the cost of living and the ability of employees to negotiate better rates of pay due to the tight labour market.
The Bank, which is widely tipped to raise the base rate of interest by a further 0.25 percentage points next week, has blamed wage rises and evidence of some raised corporate profitability for inflation proving sluggish to bring down.
The latest official data did show the rate of inflation easing by more than expected.
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Signs of light at end of tunnel’ over inflation
Higher borrowing costs, the PMI data suggested, was not just affecting households with mortgages and other loans but forcing companies to tread more carefully in their management of costs in a tougher economy.
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Dr John Glen, CIPS chief economist, wrote: “Higher borrowing costs are here to stay and the private sector knows it.
“Interest rate hikes are not just affecting new orders today but spending plans long into the future.
“The biggest concern is increasingly not if the UK economy will enter recession but for how long.”
The picture for the UK economy this year has been flat.
The Bank of England, which had warned of recession late last year only to rescind that months later, is due to release its latest forecasts alongside its rate decision next week.
A report by the EY ITEM Club, released earlier on Monday, suggested the economy would grow by 0.4% this year and 0.8% in 2024.
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