Recession risk looms as services sector slides into negative territory

The very important services sector in the UK fell into contraction in August, the first decline since January, as the economy felt the impact of rising interest rates and growing recession risks. taller.

The Services Purchasing Managers Index (PMI), compiled by S&P Global and CIPS, fell to 49.5 last month from 51.5 in July. The 50 mark separates growth and contraction.

Even though the figure signals a contraction, it is higher than economists expected and revised higher from the initial flash estimate of 48.7. PMI data is closely watched for indications of future economic activity.

Service providers generally noted client caution and dwindling new business opportunities, linked to rising interest rates, compressing disposable incomes and worries about the economic outlook.

“After a modest recovery over the past six months, companies in the services sector are now clearly feeling the impact of rising interest rates on customer demand,” said Tim Moore, chief economics officer at S&P Global Market. Intelligence.

“Concerns about the general business climate also dampened spending in August, with companies suggesting sluggish UK economic growth and persistent inflation were weighing on the outlook,” he added.

New orders from abroad rose at the slowest pace since December last year, with Brexit cited as a constraint on sales to EU customers.

The survey also showed the fastest decrease in work delays in more than three years thanks to a drop in the volume of new orders.

“Hesitancy to commit is likely to be a feature of the coming months as the UK economy becomes a riskier environment for domestic and overseas businesses and competition between service providers intensifies,” said John. Glen, Chief Economist of CIPS.

Even as production declined, the rate of input price inflation remained the lowest since May 2021. Falling costs and an increasingly competitive market resulted in the smallest rise in prices charged by businesses since two years.

The composite PMI, which combines today’s data with manufacturing figures released last week, fell to 48.6 in August.

Experts were more optimistic about the future of the UK economy than the dismal PMI data suggested, suggesting the UK would avoid recession later in the year.

Martin Beck, chief economic adviser at the EY ITEM Club, said that “GDP growth in the third quarter is likely to be stronger than recent PMI numbers suggest.”

Similarly, Samuel Tombs of Pantheon Macronomics said the PMI likely gave a “misleading reading of the economy’s dynamics.”

He pointed to the recent improvement in business confidence and said lower energy prices and rising incomes would contribute to GDP growth of 0.2 percent in the third quarter.

The UK data comes shortly after figures showed business activity in the euro zone fell more than initially expected, falling to its lowest level since the pandemic.

Hamburg Commercial Bank’s final composite PMI fell to 46.7, well below the unchanged 50 mark and below the flash estimate of 47.0.

Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, said that while the euro zone avoided recession in the first half, the “second half will present a greater challenge”.