Liz Truss will become the UK’s next prime minister with the economy on the brink of recession, according to figures that show private sector activity fell last month as businesses struggle with soaring costs.
The latest snapshot from S&P Global and the Chartered Institute of Procurement and Supply (Cips) revealed a “severe and accelerated” decline in manufacturing output in August, alongside weaker activity in the UK’s dominant service sector.
The monthly business survey, which is closely watched by the government and the Bank of England for early warning signs from the economy, found growing worries over soaring inflation and a marked reduction in confidence among firms.
According to the monthly health check from S&P Global and the Cips, cost pressures facing businesses remained at extremely elevated levels, linked to rising prices for energy and fuel as Russia’s war in Ukraine further drives up costs on the wholesale market. Unlike households, businesses do not benefit from an energy price cap.
“The incoming prime minister will be dealing with an economy that is facing a heightened risk of recession,” said Chris Williamson, the chief business economist at S&P Global Market Intelligence, with the British economy facing a “deteriorating labour market and persistent elevated price pressures linked to the soaring cost of energy”.
The monthly purchasing managers’ index from S&P/Cips fell to 49.6 in August, down from 52.1 in July. Any reading above 50 suggests growth in private sector activity.
Meanwhile, separate figures from the retail industry showed a slowdown in sales growth last month as shoppers tightened their belts.
The British Retail Consortium (BRC) said total sales grew at an annual rate of 1% in August, down from 2.3% in July, thanks to sluggish clothing sales as summer events ended and consumers cutting back on buying white goods and other big-ticket items.
Helen Dickinson, chief executive of the BRC, said urgent support for households and businesses was required from the new prime minister.
“With some predictions of inflation reaching 20% in the new year, households and retailers are preparing for a particularly tough time ahead,” she said.
Hot weather helped to encourage stronger spending growth on some items last month, including suntan lotion, while food and drink sales for summer barbecues rose by 5% compared with a year earlier.
However, economists said storm clouds were looming for retailers were bracing for a fall in demand from hard-pressed households.
Don Williams, a retail partner at the accountancy firm KPMG, said: “Worryingly, August data revealed a significant fall in clothing sales – the category which has been the most robust performer this year which could signal the start of shoppers pulling back from non-essential spending.”
The figures come as some economists suggested Britain’s economy slipped into recession this summer as households tightened their belts amid the cost of living crisis.
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The Bank of England has forecast inflation will peak above 13%, the highest level since the early 1980s, and projects a lengthy recession starting in the final quarter of the year.
Economists at Goldman Sachs said last week that inflation could peak above 22%, close to matching the postwar record set in 1975, if current high wholesale energy prices are sustained into the new year.
In her acceptance speech after beating Rishi Sunak in the Conservative leadership race, Truss pledged to “deliver a bold plan to cut taxes and grow the economy”, and also “deal with people’s energy bills” ahead of a tough winter for households and businesses.
Economists said challenges including sky-high inflation, Brexit and severe staff shortages were weighing on growth. With households facing the biggest hit to their living standards since the 1950s, the S&P and Cips snapshot reflected collapsing demand for consumer-facing services such as restaurants, hotels, travel and recreational activities.
John Glen, the chief economist at the Cips, said: “Port disruption, Brexit paperwork and shortages all continue to play a role in driving inflation, the sector is relatively powerless in the face of ever-increasing energy bills.
“Services businesses will have their eyes firmly on the new prime minister this week as they hope for a policy driven solution to rocketing costs.”