Policymakers in the UK have been put on recession high alert after surging interest rates triggered a slump in factory output and the biggest annual drop in house prices since the global financial crisis of the late 2000s.
Amid growing evidence that the 14 successive increases in the Bank of England base rate have been slowing the economy, the monthly health checks of manufacturing and the property market both pointed to a tough winter ahead.
A report from S&P Global and the Chartered Institute of Procurement & Supply (Cips) found the outlook for UK industry was among the weakest recorded outside of financial crashes and the Covid-19 pandemic.
Meanwhile, one of the UK’s biggest mortgage lenders – the Nationwide building society – said house prices had dropped by 5.3% in the year to August, the fastest annualised rate of decline since 2009.
There was better news for the chancellor, Jeremy Hunt, from the Office for National Statistics, whose revisions to past growth figures showed the economy rebounded faster and more strongly from Covid lockdowns than thought. By the end of 2021, the economy was 0.6% bigger than its pre-pandemic level rather than 1.2% smaller as previously thought.
Hunt seized upon the news that Britain had the third fastest recovery among the G7 after the US and Canada. He said: “The fact that the UK recovered from the pandemic much faster than thought shows that once again those determined to talk down the British economy have been proved wrong.”
Even so, the current signs of distress from markedly different parts of the economy will add to the Bank of England’s dilemma as it decides whether to raise interest rates again when its monetary policy committee meets later this month.
Financial markets believe the rate-setting monetary policy committee will raise borrowing costs by 0.25 percentage points to 5.5% and then leave them at that level for a considerable period. The Bank’s chief economist, Huw Pill, added to speculation that rates would soon hit a plateau during a speech in Cape Town, South Africa, where he said he favoured a “Table Mountain” approach to bring inflation down to the government’s 2% target. Pill accepted there was a risk the Bank’s anti-inflation medicine would cause unnecessary economic damage
Rob Dobson, the director at S&P Global Market Intelligence, said: “August saw a further deepening of the UK manufacturing downturn. The PMI [purchasing managers index] sank to a 39-month low as output and new orders contracted at rates rarely seen outside of major periods of economic stress such as the global financial crisis of 2008-09 and the pandemic lockdowns.”
The monthly PMI from S&P/Cips is seen as a guide to what will happen to economic activity over the coming months. August’s reading of 43.0 was sharply down on July’s 45.3, and well below the 50 level that marks the point between expansion and contraction.
Dobson said: “Manufacturers reported a weakening economic backdrop as demand is hit by rising interest rates, the cost of living crisis, export losses and concerns about the market outlook. While this is being felt across the manufacturing industry, business-to-business companies are especially hard hit. Intermediate goods producers saw the steepest drops in output, new orders and employment as a result.”
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A separate PMI for the eurozone showed the problems faced by industry were not confined to the UK, although the August reading of 43.5 was slightly less gloomy than the 42.7 recorded in July.
Fhaheen Khan, a senior economist at the manufacturers’ organisation Make UK, said: “Today’s data indicates manufacturing production has hit the brakes as slowing demand takes hold of business activity. It is no longer just high inflation that is eroding spending power, but combined with higher interest rates depleting our willingness to spend has made for an unpalatable cocktail.”
The Nationwide said the price of the average UK home was now more than £14,500 lower than in August 2022 and the weakness of the housing market was only to be expected given the spiralling cost of servicing mortgages.
Robert Gardner, the lender’s chief economist, said: “The softening is not surprising given the extent of the rise in borrowing costs in recent months, which has resulted in activity in the housing market running well below pre-pandemic levels.”
