UK Private-Sector Growth Hits Six-Month Low, Signals Potential Recession Amidst Rate Rises

UK Private-Sector Growth Hits Six-Month Low, Signals Potential Recession Amidst Rate Rises

…By for TDPel Media.

In July, private-sector growth in the UK experienced a significant slowdown, reaching its lowest rate in six months.

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This development raises concerns about the impact of the Bank of England’s recent rate hikes, which appear to be gradually slowing down the economy and potentially pushing the country towards a recession.

The S&P Global/CIPS Flash PMI for the month registered at 50.7, falling well below the expected 52.3 and the previous month’s 52.8. Nevertheless, the index remains above 50, the threshold that separates growth from decline.

The manufacturing sector suffered a decline, with a reading of 46.5 compared to June’s 48.1.

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On the other hand, the dominant service sector continued to grow, albeit at a slower pace, with a reading of 51.5.

Amidst the economic concerns, there was a positive note on inflation, as the growth in prices charged reached its lowest level in two-and-a-half years.

Additionally, manufacturers reported the most significant improvement in suppliers’ delivery times since January 1992 when the index began.

Economic Outlook and Recession Worries

Chris Williamson, chief business economist at S&P Global Market Intelligence, expressed his concerns regarding the UK economy’s current state.

He pointed out that July’s flash PMI survey data revealed a deepening manufacturing downturn and a cooling of the recent growth in the service sector.

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These indicators, coupled with pessimistic forward-looking signs, have reignited worries about the possibility of a recession.

Williamson also noted that the deteriorating growth and demand situation had an upside in the form of reduced inflationary pressures.

While manufacturing prices were falling at an accelerated rate, service sector inflation was continuing to moderate.

Nevertheless, ongoing upward wage pressures could still keep service sector price growth elevated, though the survey data signaled potential marked falls in consumer price inflation in the coming months.

Impact of Interest Rate Hikes

Dr. John Glen, CIPS Chief Economist, highlighted the significant impact of the higher borrowing costs resulting from the interest rate hikes.

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He pointed out that these rate increases were not only affecting new orders in the present but also impacting spending plans for the long term.

The growing concern was no longer if the UK economy would enter a recession but rather how long such a recession would last.

Economic Projections and Market Reactions

Ashley Webb, UK economist at Capital Economics, interpreted the data to suggest a 0.1% decline in GDP during the third quarter of the year.

According to conventional definitions, a recession is characterized by back-to-back quarters of declining GDP.

In response to the PMI data, the FTSE 100 experienced a slight rally, rising by 0.2% immediately after its release.

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The report indicated that the Bank of England might not need to raise interest rates as high as previously anticipated.

However, the pound, which had been trading above $1.30 the previous week, fell to $1.2814.

The markets now perceive a greater than 60% chance that interest rates will peak below 6%.

This is a change from earlier in the month when the market-implied peak was 6.75%.

The Bank of England is scheduled to announce its next interest rate decision next week, and a 14th consecutive hike seems highly likely.

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However, Webb suggested that the PMI data might prompt the Monetary Policy Committee to opt for a quarter-point hike instead of a half-percentage point increase.

Webb concluded that the Bank of England would probably need to maintain high interest rates until the second half of the following year to achieve its 2% inflation target.

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