UK Private Sector Slips Into Contraction Zone

(RTTNews) - The UK private sector entered the contraction territory in August ending a six-month period of expansion as sluggish domestic economic conditions as well as higher interest rates damped demand, a closely watched survey showed Wednesday.

The flash S&P Global/Chartered Institute of Procurement & Supply composite output index slipped to a 31-month low of 47.9 in August from 50.8 in the previous month, the purchasing managers' survey showed. The reading was seen at 50.3.

A PMI score below 50.0 indicates contraction. The latest reading suggested that the private sector activity was the weakest since January 2021.

Both manufacturing and service sectors posted lower levels of activity in August. The downturn in service sector output was only marginal but hit the joint-fastest for 31 months. By contrast, manufacturers reported a sharp reduction in production volumes.

The services Purchasing Managers' Index posted 48.7 in August compared to 51.5 a month ago. The reading was forecast to fall moderately to 50.8.

The manufacturing PMI came in at a 39-month low of 42.5, down from 45.3 in July and economists' forecast of 45.0.

New orders across the private sector economy decreased the most since November 2022. Backlog of work fell for the fourth straight month and the latest fall was the fastest since June 2020.

Private sector employment posted the slowest growth since March. Firms reported severe difficulties with recruiting and retaining suitably skilled staff.

Input costs increased in August due to higher wages, especially in the service economy. Nonetheless, the average cost burdens increased at the slowest pace since February 2021. Prices charged inflation moderated for the fourth straight month to its lowest in two-and-a-half years.

Business activity expectations weakened in August. The degree of confidence was the worst since December 2022.

"The early PMI survey for August suggests that inflation should moderate further in the months ahead, but also indicates that the fight against inflation is carrying a heavy cost in terms of heightened recession risks," Chris Williamson, chief business economist at S&P Global Market Intelligence, said.

"While a further hike in interest rates in September looks to be on the cards, the August PMI data will add to speculation that rates could soon peak," Williamson added.

Capital Economics' economist Paul Dales said the survey supports the assessment that the economy will enter a mild recession.

With weaker activity dampening price pressures, the Bank of England is set to raise interest rates to a peak of 5.50 percent rather than to the peak of 6.00 percent, the economist added.