The UK economy faces an increasing risk of falling into a recession as firms and households buckle under the fastest inflation rate in four decades, according to a closely watched survey of British companies.
S&P Global’s index of private sector growth unexpectedly collapsed in May to levels last seen in February 2021, when the nation was still in the grip of a coronavirus lockdown, the firm said on Tuesday. The speed of the slowdown was the fourth-largest on record and worse than anything seen before the pandemic hit.
The pound slid by as much as 0.7 per cent to $1.2504 after the report, while traders also curbed bets on Bank of England interest-rate hikes.
The survey shows the devastating impact that surging prices are having on the economy and will likely heap pressure on the government to do more to help avert a damaging period of stagflation.
The slump was most pronounced in the dominant services sector, where business expectations fell to the lowest since the first coronavirus lockdown and costs surged.
On top of an inflation rate that on course to hit double digits this year, firms are also facing a toxic mix of other challenges, with Brexit, China’s lockdowns and the war in Ukraine all cited as reasons for pessimism.
“The latest data indicate a heightened risk of the economy falling into recession,” said Chris Williamson, chief business economist at S&P Global Market Intelligence. It points “to the economy almost grinding to a halt at the same time as inflationary pressure rise to unprecedented levels.”
UK firms are seeing operating expenses rise at the fastest pace since records began in 1998, according to the survey, with services firms particularly feeling the pain. Meanwhile, export orders and expectations for future growth have both dropped to the lowest since May 2020.
S&P said its composite index for the whole economy fell to 51.8 this month, down from 58.2 in April and barely above the 50 level that separates expansion from contraction. Economists had predicted a reading of 56.5.