UK manufacturers brace for recession as inflation bites

UK manufacturers recorded a sharp drop in activity in 31 months.

British businesses are bracing for a worsening recession after both manufacturing and service sectors slumped in the fourth quarter, prompting the first fall in employment in almost two years.

S&P Global said its measure of sentiment from purchasing managers was little changed at 49 in December, indicating a contraction across the economy. That compared with last month’s reading of 48.2 and expectations for a drop to 48.

“Businesses are battening down the hatches, most notably by reducing headcounts in a sign that the downturn not only has further to run but could yet accelerate,” said Chris Williamson, chief business economist at S&P Global Market Intelligence. “For now, the downturn looks to be relatively mild.” 

The figures add to evidence of the toll being taken by higher inflation and interest rates. S&P said its index tracking employment dropped for the first time since early 2021 when a pandemic lockdown was in place.

Manufacturers are suffering the most, with the sharpest drop in activity in 31 months. Export orders declined for a sixth consecutive month, and producers reported a shortage of new work.

Lower demand

S&P said executives are turning more cautious in the face of lower demand from clients. While business confidence improved to its highest level in four months, it remained subdued by historical standards.

The figures, according to S&P, suggest the economy shrank 0.3% in the fourth quarter following a 0.2% contraction in the third. That would meet the technical definition for a recession, with two quarters of declining output.

Meanwhile, UK retail sales unexpectedly fell in November as Black Friday failed to deliver its usual boost, deepening the cost of the living crisis engulfing the sector.

The volume of goods sold in shops and online fell 0.4%, the Office for National Statistics said. Sales excluding auto fuel fell 0.3%. Economists expected a 0.3% gain on both measures.

Recession concerns

The data underscore concerns that the UK is already in recession, as the Bank of England believes.

Consumer spending accounts for two-thirds of national output and is key for growth. Separate figures show consumer confidence continues to linger around its lowest levels for at least half a century.

The decline last month was driven by online sales, with Black Friday on November 25 helping less than in previous years. Sales of auto fuel, second-hand goods at auction houses, and computer goods also declined.

That was partly offset by higher sales of food and drink, clothing, and household goods, with shoppers attracted by discounts at department stores lasting for longer.

However, any hopes that the pickup might extend into December appear to have been dashed by a week of heavy snow, freezing temperatures, and rail strikes that have hit retail and hospitality businesses hard.