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UK business output falls at steepest pace in two years

UK business A worker cuts newly manufactured bars of steel at the United Cast Bar Group's foundry in Chesterfield, Britain, April 12, 2022. Picture taken April 12, 2022. REUTERS/Phil Noble     TPX IMAGES OF THE DAY
Manufacturing suffered a steeper decline than other UK businesses in January. Photo: Phil Noble/Reuters

UK business activity plunged to a two-year low in January as higher Bank of England interest rates, strikes and weak consumer demand slowed down the economy.

S&P Global's flash Purchasing Managers' Index (PMI) gave a reading of 47.8 for the UK services sector in January, down from 49 in December. A reading below 50 indicates a contraction.

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"Weaker-than-expected PMI numbers in January underscore the risk of the UK slipping into recession," S&P Global's chief business economist, Chris Williamson, said.

"Industrial disputes, staff shortages, export losses, the rising cost of living and higher interest rates all meant the rate of economic decline gathered pace again at the start of the year."

Manufacturing suffered a steeper decline, down to 46.7, although this was better than the 45.5 forecast by economists.

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However, growth expectations rebounded in the wake of reduced inflationary pressures.

“There were some bright spots in the survey, including improved business expectations for the year ahead and a further cooling of inflationary pressures. The overall rate of decline indicated also remains only modest,” Williamson said.

“But this is undeniably a disappointing start to the year for the UK, reflecting not just short-term hits to growth such as strike action and the rise in energy costs due to the Ukraine war, but also highlighting the ongoing damage to the economy from longer term structural issues such as labour shortages and trade woes linked to Brexit.”

The data showed that prices charged by businesses increased at the slowest pace since August 2021, although the rise was still steep when compared to other years.

Costs rose at the slowest pace since April 2021, as energy prices dropped, though wage increases remained significant. UK firms also cut a small number of jobs, in contrast to the hiring wave that took place in 2021 and 2022.

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Rhys Herbert, senior economist at Lloyds Bank, said: "Another month of contraction in the headline figure might surprise given a more upbeat sentiment among markets in recent weeks.Inflation is falling in the US and as a result the pace of Federal Reserve interest rate rises is now slowing.

"As that development primarily reflects waning international inflationary pressures, it is a promising sign that the UK may not be far behind. The headline figure does hide how manufacturing faces tougher trading conditions than services. But both sectors will have felt the pressure from strike action this month.The recent scale of this is one reflection of the domestic inflationary pressures the economy still faces in 2023, not least from a tight labour market."

Watch: What is a recession and how do we spot one?