Liz Truss will become Britain’s next prime minister, whose economy is teetering on the brink of recession, according to figures showing private sector activity has slumped over the past month as businesses grapple with rising costs.
The latest snapshot from S&P Global and the Chartered Institute of Procurement and Supply (Cips) showed a “severe and accelerating” decline in manufacturing output in August, along with weaker activity in the UK’s dominant services sector.
The monthly business survey, which is closely monitored by the government and the Bank of England for early warning signals from the economy, revealed growing concerns about rising inflation and a sharp drop in business confidence.
Cost pressures remained extremely high, coupled with rising energy and fuel prices as Russia’s war in Ukraine continues to push up costs in the wholesale market. Unlike households, companies do not benefit from an energy price cap.
“The new prime minister will face an economy that is at heightened risk of recession,” said Chris Williamson, chief economist at S&P Global Market Intelligence, as the UK economy faces a “deteriorating labor market and persistently elevated price pressures”. with rising energy costs.
The monthly S&P/Cips purchasing managers’ index fell to 49.6 in August from 52.1 in July. Any reading above 50 indicates growth in private sector activity.
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The numbers come as some economists suggested the UK economy slipped into recession this summer as households tightened their belts amid the cost of living crisis. The Bank of England is forecasting inflation to top 13%, the highest level since the early 1980s, and predicts a prolonged recession from the last quarter of the year.
Economists at Goldman Sachs said last week that inflation could peak above 22%, close to the post-war record set in 1975, if current high wholesale energy prices continue into the New Year.
In her acceptance speech after defeating Rishi Sunak in the Conservative leadership race, Truss vowed to “come up with a bold plan to cut taxes and boost economic growth” and “take care of people’s energy bills” before a harsh winter for households and company is imminent.
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Economists said challenges such as sky-high inflation, Brexit and a severe staff shortage are weighing on growth. As households face the biggest drop in their standard of living since the 1950s, the snapshot from S&P and Cips reflected collapsing demand for consumer-facing services such as restaurants, hotels, travel and leisure activities.
John Glen, Cip’s chief economist, said: “Port disruptions, Brexit paperwork and shortages continue to play a role in fueling inflation, with the sector relatively powerless in the face of ever-rising energy bills.
“Services companies will be keeping a close eye on the new prime minister this week as they hope for a policy-driven solution to skyrocketing costs.”
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