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Recession fears rise as services contract, purchasing managers’ index shows

The biggest sector of the economy remained in a downturn last month as new orders continued to fall owing to the cost of living crisis, a closely watched survey shows.

The monthly purchasing managers’ index (PMI) by S&P Global and CIPS showed that the service sector contracted for a second month in a row as economic uncertainty hit demand.

Responses to the survey of 650 service companies between November 11 and 28 produced a reading of 48.8 on the index, which was below the 50 mark separating growth from contraction. The level was unchanged from October and was in line with economists’ expectations.

Services account for the vast majority of economic activity in the UK, so a slump in the sector adds to fears that the country is heading into a recession.

Sales fell for a third consecutive month and recorded the sharpest drop since the lockdown in January last year. Businesses said that budgets were tightening among both their domestic and foreign clients.

Inflation has ripped through the global economy since the coronavirus pandemic and the escalation of the Russia-Ukraine war in February, putting many of the world’s biggest economies on course for a downturn next year as high prices weaken demand.

The prices set by companies for their services rose for a 23rd consecutive month but the rate of inflation fell to its lowest level in ten months as lower demand made it less likely that companies could raise prices and maintain sales.

Inflation hit its highest level in more than four decades at 11.1 per cent in October, the latest figures from the Office for National Statistics showed.

Increased political stability in the UK has lifted business confidence from its low in October but optimism among business leaders is at one of the lowest levels recorded over the past decade.

Chris Williamson, chief business economist at S&P Global market intelligence, said the UK economy was facing its toughest time since the 2008 financial crisis, excluding the pandemic. “A further contraction signalled by the PMI surveys hints at a growing recession risk for the UK. The overall rate of economic contraction has held steady compared to October, indicative of gross domestic product [GDP] falling at a quarterly rate of 0.4 per cent.”

He added: “Inflows of new work fell at an increased rate, indicating slumping demand for goods and services, forcing companies to pare back their hiring, resulting in only very modest employment growth.”

Martin Beck, chief economic adviser to the EY Item Club, said: “Combining the services reading with November’s manufacturing survey, the composite PMI was also unchanged at 48.2, the fourth successive sub-50 contractionary reading.”

The results added to evidence that GDP, which fell by 0.2 per cent in the third quarter of the year, was on course to drop again in the present quarter, he said, adding that falling activity would probably lead the Bank of England’s monetary policy committee to slow the pace of interest rate rises in its meeting on December 15.

The central bank implemented its biggest rate rise on record last month, when it lifted the base rate by 0.75 percentage points to its present level of 3 per cent.

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Recession fears rise as services contract, purchasing managers’ index shows

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