UK Economy on the Brink: PMI Data Signals Persistent Contraction

Highlights

• PMI at 48.6; third consecutive month of contraction
• Manufacturing hits eighth month of decline
• Business optimism sinks to 2023 low

UK Economy Faces Persistent Contraction, Lowest Optimism Since Last Year

The latest data from the S&P Global/CIPS Flash UK PMI Composite Output Index reveals ongoing contraction in the UK private sector for the third consecutive month. October’s numbers show a slight uptick at 48.6 from September’s 48.5, but this still remains below the critical 50.0 threshold, marking a contraction rather than expansion. This decline is recorded across both manufacturing and service sectors, with manufacturing taking the harder hit.

Manufacturing and Services Sector in Downturn

October witnessed the manufacturing sector recording a three-month high at 45.3, yet it was the sector’s eighth consecutive month of decline, the longest since the 2008/09 recession. Firms noted customer destocking and a dearth of new orders as factors affecting production. On the other hand, the services sector, with a marginal drop in business activity, recorded a nine-month low at 49.2. The primary reasons cited include subdued consumer confidence, increased borrowing costs, and weak real estate demand. Notably, technology services were the rare bright spot where activity growth was reported.

New Orders and Employment Numbers Fall

New order volumes across the private sector continued to contract, with October marking the fourth consecutive month of decline. Corporate caution and stretched household budgets were attributed to this decrease. The employment scenario also looked grim, with staffing numbers in decline for the second month in a row. Non-replacement of voluntary leavers and redundancies were reported in both sectors.

Dim Outlook and Low Business Optimism

Business optimism weakened for the first time since July, reaching the lowest level in 2023. Both manufacturing and service sectors expressed equal concerns about the UK’s economic outlook and higher borrowing costs. Additionally, the study reveals input price inflation easing for the third consecutive month, largely due to softer cost pressures in services and falling purchasing prices in manufacturing.

Short-term Forecast: Bearish Outlook

With mounting concerns about the UK economy’s direction, higher living costs, and diminishing export markets, a bearish short-term outlook seems inevitable. Though the decline in overall output remains modest, the intensifying gloom casts doubts on any immediate economic rebound. Even if inflationary pressures moderate, weak demand and dwindling business optimism suggest that the UK could be flirting with a mild recession in the coming months.