UK economy grinds to a near-halt in August

The UK economy practically ground to a halt in August amid a slump in manufacturing activity, according to a survey released on Tuesday.

The S&P Global/CIPS flash PMI composite output index, which measures activity in the manufacturing and services sectors, fell to an 18-month low of 50.9 from 52.1 in July. This is just above the 50.0 mark that separates contraction from expansion and marks the worst reading since the Covid lockdown in February 2021.

The services sector purchasing managers’ index nudged down to 52.5 in August from 52.6 the month before.

Meanwhile, the manufacturing output index declined to a 27-month low of 42.4 from 48.9. The wider manufacturing PMI declined to 46.0 this month from 52.1 in July.

Annabel Fiddes, Economics Associate Director at S&P Global Market Intelligence, said: "The UK private sector moved closer to stagnation in August, as mild growth of activity across the service sector only just offset a deepening downturn at manufacturers. Waning customer demand amid the weaker economic outlook, and shortages of both staff and inputs, were reported to have hit goods producers hard, with firms registering the quickest drops in output and new work since May 2020.

"Excluding the initial phase of the pandemic in early-2020, the reduction in manufacturing output was the quickest seen since the start of 2009. Meanwhile, the service sector registered the weakest increase in activity since the recovery began in early 2021. “More encouragingly, the latest survey also pointed to a further easing of inflationary pressure, with average input costs rising at the softest rate for nearly a year. Though still well above the historical average, the moderation in cost pressures will provide some relief to Bank of England policymakers who are keen to tame inflation, which is currently at a four-decade high."

Paul Dales, chief UK economist at Capital Economics, said: "Overall, we suspect the composite PMI will be ringing the recession alarm bell before long.

"But with inflationary pressures still very intense, the Bank of England will have little choice but to continue raising interest rates, from 1.75% now to 3.00%."