UK business activity drops at fastest pace in two years as cost rises bite

High energy prices, rising interest rates and falling demand point to risk of recession, say analysts

Business activity contracted at its fastest pace in two years in December as the high cost of living restricted household spending and companies cut investment, raising the prospect of a UK recession.

The services sector, which accounts for about three-quarters of private sector output, faced the biggest squeeze since the second Covid-19 lockdown, according to a closely watched survey. A slump in manufacturing output dating back to last August continued in December.

Illustrating the effects of high energy prices, rising interest rates and falling consumer demand, business reported “a sustained downturn” in new orders that meant they were churning through backlogs of old orders to maintain staffing levels.

The S&P Global/Cips flash purchasing managers’ index, which includes 80% of the survey’s responses from the services and manufacturing sectors, dropped below the level expected by City economists to 47.8 from 49 in December. A reading below 50 indicates activity contracted.

Chris Williamson, the chief business economist at S&P Global Market Intelligence, said industrial disputes, staff shortages, export losses, the rising cost of living and higher interest rates “all meant the rate of economic decline gathered pace again at the start of the year”.

He said: “Weaker than expected PMI numbers in January underscored the risk of the UK slipping into recession.”

Britain is expected by many economists to suffer a recession in the first half of 2023 before a modest recovery later in the year.

Inflation, which has stayed above 9% since last April, is forecast to fall back before the end of the year, taking the pressure off the Bank of England to keep raising its base rate much above the current 3.5%. Headline annual inflation in the UK is currently 10.5%, well above the Bank’s 2% target.

Firms reported that the prospect of household budgets coming under less intense pressure from the summer onwards from inflation meant that they expected their own situation to improve as the year progresses.

The report said: “The latest reading pointed to the strongest degree of optimism for eight months.

“Higher levels of confidence were recorded in both the manufacturing and service sectors, driven by hopes of an improving global economic backdrop and lower domestic inflationary pressures over the course of 2023.”

The Chinese and US economies are forecast to improve later this year while the eurozone is on course to avoid a recession.

More immediately, firms reported hiking their prices to pass on more than 18 months of rising raw materials and energy costs with the addition of recent increases in staff wages.

Williamson said: “There were some bright spots in the survey, including improved business expectations for the year ahead and a further cooling of inflationary pressures.

“The overall rate of decline indicated also remains only modest. But this is undeniably a disappointing start to the year for the UK, reflecting not just short-term hits to growth such as strike action and the rise in energy costs due to the Ukraine war, but also highlighting the ongoing damage to the economy from longer term structural issues such as labour shortages and trade woes linked to Brexit,” he added.


Phillip Inman

The GuardianTramp

Related Content

Article image
UK private sector expands at fastest pace in seven years
August manufacturing and services surge follows return of business activity after lockdown

Phillip Inman

21, Aug, 2020 @10:37 AM

Article image
Factories bearing the brunt of UK economic slowdown
Higher costs, weaker demand and bottlenecks sink manufacturing output to lowest level since start of pandemic

Larry Elliott

23, Aug, 2022 @11:54 AM

Article image
Jeremy Hunt warns of ‘tough road ahead’ as UK economy shrinks
GDP fall of 0.2% for three months to September gives bleak picture in run-up to autumn statement

Richard Partington Economics correspondent

11, Nov, 2022 @2:30 PM

Article image
UK economy shrinks by 0.3% on back of manufacturing slump
August GDP data from ONS gives strong signal that UK is entering recession

Phillip Inman

12, Oct, 2022 @6:26 AM

Article image
UK economy on brink of recession as Truss takes over, figures show
Activity in manufacturing and services fell last month as businesses struggle with soaring costs

Richard Partington Economics correspondent

05, Sep, 2022 @12:30 PM

Article image
Survey shows record rise in UK business activity in June
UK manufacturing returned to growth while activity in services sector contracted

Larry Elliott Economics editor

23, Jun, 2020 @10:11 AM

Article image
UK factory output ‘falling at fastest rate in more than two years’
CBI calls for support on energy costs as country will be in recession throughout much of 2023

Larry Elliott Economics editor

19, Dec, 2022 @12:37 PM

Article image
Fears of UK double-dip recession rise as activity slumps in Covid-19 lockdown
Service sector hit hard by closure of shops and restaurants as manufacturing also suffers

Larry Elliott Economics editor

22, Jan, 2021 @4:19 PM

Article image
UK economy ends 2016 on high – but rising import prices starting to bite
British businesses helped by fall in sterling, finds BCC survey, but inflation fears and Brexit uncertainty expected to slow growth this year

Phillip Inman Economics correspondent

05, Jan, 2017 @12:01 AM

Article image
Manufacturing output drops at fastest pace for two years

Latest ONS data much worse than City forecasts – heightening concerns the UK economy's recovery is faltering

Heather Stewart

10, Jun, 2011 @9:27 AM