UK business confidence hits two-year low as recession fears mount

British business confidence was worse than expected in January, hitting a two-year low and amplifying fears that the UK economy is sliding into recession, according to a closely watched survey.

The S&P/Cips global flash UK composite purchasing managers’ index, a measure of private sector activity, fell to 47.8, down from 49 in December — the fastest rate of decline since January 2021 when the country was in national lockdown.

The reading remained below the 50 mark, which indicates the majority of businesses reported a contraction, for the sixth consecutive month and was lower than the 49.1 forecast by a Reuters poll of economists.

“Weaker than expected PMI numbers in January underscore the risk of the UK slipping into recession,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.

“The rising cost of living and higher interest rates all meant the rate of economic decline gathered pace again at the start of the year,” he added.

The services sector drove the downturn, with business activity falling to 48 in January from 49.9 in the previous month.

Survey respondents cited higher interest rates and low consumer confidence as the main factors that impeded business activity.

Factories, which account for less than 10 per cent of Britain’s economic output, fared better, as the manufacturing PMI rose to a four-month high of 46.7 in January, up from 45.3 in December.

Jobs were lost as some companies tightened their belts in the face of economic headwinds, while others were constrained by a lack of available labour.

Staffing cutbacks were most prevalent in the manufacturing sector, whereas service providers reported a slight rise in employment at the start of 2023.

Meanwhile, the PMI data showed that business expectations for the year ahead improved considerably in January. Hopes of a better global economic backdrop and lower domestic inflation continued to boost business optimism after its October low-point.

“Optimism among private sector firms was the best for eight months signaling the downturn may not be as long and protracted as feared,” said John Glen, Cips chief economist.

Britain’s economy fared better than expected in November, according to official data this month, suggesting that the UK might have avoided recession at the end of 2022.

But “despite some bright spots in the latest release, a shallow recession in 2023 remains a strong probability in light of January’s poor PMI”, said Daniel Mahoney UK economist at Handelsbanken.

The PMI survey feeds into other indicators that suggest the British economy has been contracting despite price pressures easing back from historic highs.

Separate data last Friday showed that retail sales dropped in December, while consumer confidence remained near an all-time low for the ninth month in a row in January, marking the longest period of pessimism in nearly 50 years.

The Bank of England raised interest rates to 3.5 per cent in December, indicating that more increases were likely despite the economy sliding into recession, as the central bank tries to tame inflation that hit a 41-year high in October.

The PMI data stood in stark contrast to composite PMI readings from other European countries, also released on Tuesday, which showed that eurozone activity returned to growth in January for the first time since June 2022.

The CBI, the employers’ organization, reported that while manufacturing costs continued to rise in the three months to January, they did so at their slowest pace in nearly two years.

The data, released on Tuesday, suggested that UK inflation may have peaked, according to some analysts. But Anna Leach, CBI deputy chief economist, noted a decline in new orders was also reflected in the data. “There are signs that demand is easing too,” she said.

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