Recession fears grow as UK business activity shrinks

Economists have warned of a “heightened” risk of a recession after new figures revealed that UK businesses have suffered an unexpectedly sharp downturn during August.

Aside from the Covid crisis, the latest purchasing managers’ index (PMI) points to one of the sharpest falls in Britain’s business activity since the 2008 banking crisis.

The composite PMI fell from 50.8 in July to 47.9 in August on the back of lower orders and higher borrowing costs for UK firms – with both the services sector and manufacturing seeing shock contractions.

Chris Williamson, chief business economist at S&P Global Market Intelligence, said it showed that the fight against inflation through higher interest rates was “carrying a heavy cost in terms of heightened recession risks”.

He added: “A renewed contraction of the economy already looks inevitable, as an increasingly severe manufacturing downturn is accompanied by a further faltering of the service sector’s spring revival.”

It was the first monthly decline since January and was significantly below expectations, following a consensus among economists of a 50.3 reading. Any reading above 50 is considered to show the sector is growing, while anything below represents a contraction.

Mr Williamson said it show that GDP would fall by 0.2 per cent in the second quarter with “worse likely to come”. He added: “Barring pandemic lockdown months, this is one of the steepest contractions since the global financial crisis.”

John Glen, CIPS’ chief economist, said high interest rates “are starting to have their intended effect of dampening demand and reducing inflationary pressures”.

Martin Sartorius, the CBI’s principal economist, said: “With output volumes contracting at their fastest pace since the Covid-19 pandemic and order books deteriorating, this survey makes for gloomy reading for manufacturers.”

It comes as chancellor Jeremy Hunt comes under pressure from Tory MPs to prepare tax cuts at the autumn budget, after UK government borrowing was shown to be lower than expected last month.

Former business secretary Sir Jacob Rees-Mogg said it showed exposed “the continued failure of the OBR [Office for Budgetary Responsibility]” and left some headroom for tax cuts. “This would pay for the total abolition of death duties and leave billions to spare.”

But Mr Hunt said the government would be “sticking to our plan” – with borrowing still more than four times higher than a year ago and remained the fifth highest July borrowing since records began.

Pat McFadden, Labour’s shadow chief secretary to the Treasury, told Sky News, said he was “alarmed” at hearing Tory calls to “repeat” unfunded tax cuts seen during Liz Truss’ disastrous mini-Budget.

Meanwhile, experts and officials played down the prospect of a post-Brexit UK-India trade deal being down to boost Britain’s economy this autumn.

International trade secretary Kemi Badenoch, in India today for talks with G20 trade and investment ministers, said the prospect of a free trade agreement showed that the “voices of doom” were wrong.

But government sources have play down the chances of getting a deal agreed by Rishi Sunak’s India visit in September – with his ministers’ refusal so offer more visas to Indian workers thought to be a sticking point.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, warned that trade deal is likely to stay “tantalisingly out of reach” unless the Tory government eases its stance on immigration.