UK Economy Shows Signs of Recession Amidst Bank of England’s Interest Rate Halt
Britain’s economy displayed clear recession signals on Friday, a day after the Bank of England (BoE) called a halt to its long run of interest rate increases. The decision to keep rates on hold came after a business survey revealed that companies endured a tougher September than anticipated, leading to growing unemployment.
The preliminary reading of the UK S&P Global Purchasing Managers’ Index (PMI) for the services sector plummeted to its lowest level since the pandemic lockdown in January 2021, falling below all forecasts in a Reuters poll of economists. This was the lowest point the index had reached since the Global Financial Crisis, with its gauge of jobs experiencing its largest decline on record outside of the pandemic.
The news had an impact on the value of sterling, which dropped about 0.4% against the U.S. dollar at 1105 GMT, hovering just above its lowest level since March. Investors now contemplate how long the BoE can maintain its plan to keep interest rates at current levels before making a cut to support the economy.
Although the PMIs for the euro zone showed a slight improvement, they still suggested an approaching recession. Meanwhile, a separate survey conducted by the Confederation of British Industry (CBI) revealed a decline in factory output, with expectations of stagnation for the remainder of 2023.
Martin Beck, chief economic advisor to forecasters the EY ITEM Club, stated, “Bouncing along the bottom is likely to be a story which persists for the near term.” However, he also mentioned that while the impact of the BoE’s consecutive rate hikes was yet to be fully felt and the jobs market was weakening, weaker inflation and the relief that borrowing costs may have peaked indicated that the economy would likely avoid a severe downturn.
Despite the grim outlook for businesses, there were signs of resilience among consumers. Official data indicated that retail sales rose in August, partially recovering from a slump in July caused by adverse weather conditions. Additionally, a measure of consumer confidence reached its highest level since January 2022.
However, data company S&P Global suggested that its survey results were consistent with a 0.4% decline in quarterly economic output. Chris Williamson, chief business economist at S&P Global, expressed concern, stating, “The disappointing PMI survey results for September mean a recession is looking increasingly likely in the UK.”
On the other hand, Samuel Tombs, an economist with Pantheon Macroeconomics, disagreed, pointing out that wages were finally surpassing inflation, household energy prices were expected to decrease further, and consumer confidence levels remained stable. He noted, “Needless to say, though, today’s report further increases the chances that the BoE’s tightening cycle is over.”
As the Bank of England’s decision to halt its interest rate increases reverberates through the economy, the future trajectory of the UK’s economic performance remains uncertain. The impact of global economic conditions, such as the ongoing COVID-19 pandemic and the potential recession in the eurozone, will undoubtedly play a significant role in shaping the country’s economic outlook.
More detail via Investing.com here… ( Image via Investing.com )