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UK Economy Poised for Contraction as Rates Rise

FILE PHOTO: A woman uses a trolley as she shops at a grocery store in East London, in the Eastern Cape province, South Africa, July 7, 2022. REUTERS/Siphiwe Sibeko

BNR – The United Kingdom’s economy seems to be going for a contraction or a potential recession in the July-September period.

The S&P Global/CIPS UK Purchasing Managers’ Index (PMI) revealed a sharp drop in demand for goods and services in August. The drop is caused by the combined impact of rising interest rates and reduced household spending.

Lowest PMI Reading in 2.5 Years

The PMI has registered a reading of 47.9 for this month. It is a key barometer of economic health that assesses metrics including orders and employment.

Any figure below 50 indicates a contraction, and this latest reading represents the lowest level recorded in 2.5 years. This decline comes after a six-month period of growth.

While the survey points to economic challenges, economists have noted some positive aspects. The PMI figures underscore the effectiveness of the Bank of England’s attempts to curb inflation.

Consequently, the pound dipped against the dollar and analysts in the City revised their interest rate expectations to a peak of 5.5%, down from the earlier projection of 6%.

Currently, interest rates stand at 5.25%, following a series of increases since late 2021 when they were close to zero.

Nonetheless, the PMI report also highlights the potential downside of the fight against inflation.

Efforts to Control Potential Economic Contraction

Chris Williamson, chief business economist at S&P Global Market Intelligence, emphasised that the efforts to control inflation could lead to heightened recession risks.

The PMI’s findings resonate with broader economic trends, with both the manufacturing and services sectors experiencing declines in August.

The report further cites challenges with recruitment faced by some businesses, exerting upward pressure on wages.

Rhys Herbert, senior economist at Lloyds Bank, said the decrease in retail sales is a warning sign of autumnal weakness. She further added that lingering recruitment difficulties could continue to impact economic dynamics.

Also, the Bank of England’s commitment to raising rates raises questions about the balance between price rises and economic growth.


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