New PM Rishi faces an economy on the brink after Truss’ catastrophe

The scale of the economic challenge facing Prime Minister Rishi Sunak and Chancellor Jeremy Hunt was exposed yesterday after data showed the UK was likely in recession.

According to S&P Global’s Purchasing Managers’ Index (PMI), the economic downturn worsened in October as output in the manufacturing and services sectors contracted at the fastest rate since January 2021.

The closely watched survey showed a value of 47.2 – well below 50, separating contraction from growth – as the crisis continued to bite into the cost of living. This was a 21-month low and the third consecutive month of contraction in production.

The outlook in the euro-zone was also bleak, as the PMI fell to a 23-month low of 48.1. Germany reported the strongest contraction, while growth in France ground to a halt.

Andrew Kenningham, an economist at the consultancy Capital Economics, said the data shows the eurozone is “sliding into a pretty deep recession and inflationary pressures remain intense.”

Meanwhile, national statistics in China showed the economy grew by 3.9 percent in the third quarter, which – although an improvement from the contraction of 2.6 percent in the second quarter – meant the country still fell short of its target. of 5.5 percent for the full year.

Chris Williamson, chief business economist at S&P Global, said the UK data showed “the pace of economic decline following the recent upheavals in political and financial markets.”

He said: “Increased political and economic uncertainty has caused business activity to decline at a rate not seen since the global financial crisis in 2009 if the pandemic lockdown months are excluded.”

Economic output “certainly appears to be declining in the fourth quarter after a likely contraction in the third quarter, meaning the UK is in recession,” he added. The latest official data shows that economic output fell by 0.3 percent in the three months to August compared to the previous quarter.

Truss and Sunak on stage after Conservative leadership election campaign at Wembley Arena

The services sector saw its first drop in activity since February 2021, as the UK was just getting ready to get out of the latest Covid lockdown. John Glen, chief economist at the Chartered Institute of Procurement & Supply, said: ‘Concerns about rising energy and food bills affected consumers’ appetites for pubs and restaurants, and demand was reduced.’

But there were signs that red-hot inflation was beginning to abate, as the latest rise in operating expenses was the least apparent in 13 months. While the Bank of England may be relieved that cost pressures are beginning to ease as it tries to combat the rise in the cost of living, Williamson said officials were unlikely to take their foot off the pedal for the rate hike. time fast.

The Bank has been raising rates since December to encourage saving rather than spending and to keep prices under control. Yet cost pressures were still greater than at any time in the 20 years before the pandemic – and the services sector, in particular, struggled with rising energy bills and jumps in staff wages.

Markets are pricing in a 0.75 percentage point hike for the next monetary policy meeting on Nov. 3, which will push interest rates to 3 percent. “In addition to the collapse in political stability, financial market tensions and declining confidence, these higher borrowing costs will add to speculation about a worryingly deep recession in the UK,” Williamson added.

The grim numbers suppressed any relief in the currency markets over Sunak’s appointment yesterday. While the pound rose shortly after the announcement, it fell 0.3 percent against the euro to $1.143 and 0.2 percent against the dollar at $1.123 toward the end of the day.

Economists estimate that given higher borrowing costs, rising inflation and increased spending on schemes such as the energy bill price cap, the government will need to find an additional £40 billion in cuts and tax hikes to get public finances back on a sustainable footing. . But with moderate growth weighing on tax revenues, this could be a difficult task for Sunak and his chancellor.