UK economic activity is contracting at its fastest in almost 2 years

British economic activity contracted at its fastest rate in almost two years in October as construction companies reported the first fall in orders since May 2020, in another sign of an imminent recession.

The S&P Global/Cips UK cross-sector purchasing managers’ index (PMI), which measures monthly changes in activity in manufacturing, services and construction, fell to 48.7 in October from 49.4 in the previous month, according to data released on Friday.

That number — the lowest since January 2021 and well below the 50 mark, which suggests a majority of companies are reporting declines — is due to cross-industry concerns about the impact of record-high inflation and tighter monetary policy.

Data released this week showed the decline was being driven by manufacturing, which reported the sharpest contraction of all. But companies in the service sector also reported declining production volumes in October for the first time since the beginning of last year.

Construction PMI showed slight improvement on Friday, rising to 53.2 in October from 52.3 in September. But that wasn’t enough to change the overall picture of the UK economy.

The Bank of England raised interest rates to 3 percent on Thursday, the highest since 2008, as it struggles to contain inflation, which is at a 40-year high. The central bank also forecast that the economy would be in recession by next year and the first half of 2024.

The construction PMI also indicated that the sector’s expansion in October is likely to be short-lived.

The new construction orders sub-index fell below the 50 mark in October, ending a 28-month streak of sustained growth. According to the data, construction companies noted weaker customer confidence and headwinds from rising input prices and higher borrowing costs.

Some construction companies also reported a drop in new orders due to heightened political uncertainty.

Line chart of Purchasing Managers Sub-Indices, above 50 = Majority of companies reporting expansion showing UK construction orders for first time in over 2 years

Tim Moore, economics director at S&P Global Market Intelligence, which compiles the survey, said the forward-looking indicators emphasized that growth “would be harder to achieve in the coming months as rising borrowing costs, economic uncertainty and cost restraints all weighed in the order books in October”.

The latest data signaled another sharp increase in the average cost burden across the construction sector. Higher purchase prices were predominantly associated with increases in energy costs, fuel bills and the passing on of rising wages.

Construction companies have been the most pessimistic about growth forecasts for the coming year since May 2020. Many cited recession worries and a deterioration in the UK economic outlook due to rising political uncertainty as concerns.

Kelly Boorman, partner and national construction manager at accountancy firm RSM UK, said that with interest rates soaring, construction output “is likely to continue to fall as projects become more expensive, further straining the supply chain and subcontracting”. .

She said she expects the economy to have slumped 0.5 percent in the third quarter and will contract by a similar amount in the fourth quarter as consumers cut spending amid high inflation and rising mortgage bills. UK economic activity is contracting at its fastest in almost 2 years

Adam Bradshaw

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