Private sector growth stalled over the last month, according to a closely watched survey, raising fears that the economy is edging closer to recession.
Rising employment costs from Rachel Reeves’s decision to increase business taxes in her first budget, along with soft consumer demand, have led UK companies to cut workers at the fastest rate since the global financial crisis in 2009, excluding the pandemic.
The latest flash composite purchasing managers’ index (PMI) from S&P Global was unchanged in December at 50.5, below expectations and just above the 50-point threshold that indicates stagnation.
Economists at Capital Economics said the survey was consistent with a “0.3 per cent quarter-on-quarter contraction in the fourth quarter”, which would raise the threat of recession at the beginning of next year, regarded as two consecutive quarters of negative growth.
However, the consultancy noted: “We doubt the economy will be quite as weak as that, given the PMIs do not capture rises in government spending.” Matt Swannell, chief economic advisor to the EY ITEM Club, said that the PMI “is a relatively poor leading indicator of GDP growth” as it is overly sensitive to sentiment, which has plunged since the budget, rather than tangible economic activity.
The chancellor announced a £70 billion increase in public spending in the budget on October 30, which economists believe will accelerate GDP growth in the short term.
The PMI reading for the services businesses rose sharply to 51.4 from 50.4 in November. This exceeded forecasts and suggested that the UK’s most important sector, which makes up more than 80 per cent of the economy, gathered momentum over the past month.
The increase offset a decline in the manufacturing PMI to an 11-month low of 47.3 from 48.
Figures published by the Office for National Statistics this month showed that the economy contracted by 0.1 per cent in October, confounding analysts’ expectations for a slight increase in GDP. Sluggish activity in the services sector constrained overall growth, while the ONS said businesses had paused spending decisions owing to uncertainty over tax increases at the budget.
Employers’ national insurance contributions (NICs) will rise to 15 per cent from 13.8 per cent in April.
The chancellor’s fiscal package has contributed in part to a slump in business confidence and hiring intentions in October and November. Vacancies fell at the quickest pace since August 2020, according to KPMG and the Recruitment and Employment Confederation.
Chris Williamson, chief business economist at S&P Global Market Intelligence, said: “Businesses are reporting a triple whammy of gloomy news as 2024 comes to a close, with economic growth stalled, employment slumping and inflation back on the rise.
“Economic growth momentum has been lost since the robust expansion seen earlier in the year, as businesses and households have responded negatively to the new Labour government’s downbeat rhetoric and policies.”
However, the jump in services PMI indicates that this erosion in sentiment may have been a blip and could gradually improve now that households and businesses have certainty over tax and spending policy. Separate data from GfK showed that consumer confidence rose in November and December.
According to the inflation element of the PMI, private sector firms increased prices at the quickest pace in nine months, driven “by a robust and accelerated rise in the service economy”. Companies complained of rising costs owing to the NICs increase and said that export sales dropped at the sharpest pace since October 2023.
Economists at the Bank of England watch price dynamics in the services industry closely. ONS data on Wednesday is likely to show that headline inflation rose to 2.6 per cent in November, from 2.3 per cent in October.
The Bank of England is poised to keep interest rates on hold at 4.75 per cent this Thursday despite other central banks loosening policy quickly. Last week the European Central Bank, Bank of Canada and the Swiss National Bank all cut borrowing costs.
Thomas Pugh, an economist at RSM, a consultancy, said that the Bank of England “is now facing that nasty trade-off between slow growth and rising inflation, which will force it to cut interest rates only gradually next year. An early Christmas present on Thursday from the MPC [monetary policy committee] seems very unlikely.”
