UK recession risk deepens as companies falter

British companies endured a much tougher September than feared, marked by growing unemployment and recession risks, according to a survey on Friday that underlined why the Bank of England halted its run of interest rate hikes this week.

A preliminary “flash” reading of the UK S&P Global Purchasing Managers’ Index (PMI) for the services sector dropped to 47.2 from 49.5 in August, sinking further below the 50 dividing line between growth and contraction.

The survey is closely watched by the BoE and Treasury as a high-frequency gauge of activity in the economy.

It was the lowest PMI score since the pandemic lockdown of January 2021 and below all forecasts in a Reuters poll of economists that had pointed to a reading of 49.2.

Aside from the COVID-19 pandemic, the index last fell this low during the Global Financial Crisis, while its gauge of employment suffered its biggest fall on record outside of the pandemic.

BoE rate-setters had access to the survey ahead of their decision to leave interest rates on hold this week at 5.25%.

Data company S&P Global said the figures were consistent with a drop in quarterly economic output of around 0.4%.

“The disappointing PMI survey results for September mean a recession is looking increasingly likely in the UK,” said Chris Williamson, chief business economist at S&P Global.

The survey showed a further decline in inflation pressure from companies, despite widespread reports of strong wage growth.

“A major concern in the inflation outlook has been wage growth, but with the survey now signalling the sharpest fall in employment since 2009, wage bargaining power is being eroded rapidly,” Williamson said.

The PMI for the manufacturing sector improved in September, to 44.2 from, 43.0, but remained mired in contraction territory.

S&P Global’s gauge of manufacturing and services combined – the composite PMI – fell to 46.8 from 48.6 in August, the lowest reading since January 2021.

“The third quarter is indeed seeing a mounting toll on the economy from the reality of the increased cost of living and the recent rapid rise in interest rates,” Williamson said.