UK Private Sector Shrinks Most In 2 Years

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The UK private sector contracted at the fastest pace in two years in January with a marked loss of momentum in services activity, and reflected the squeeze on household incomes and risk aversion among corporate clients, results the closely watched S&P Global survey revealed Tuesday.

The S&P Global/Chartered Institute of Procurement & Supply flash composite output index declined unexpectedly to 47.8 in January from 49.0 in December. The expected score was 49.3.

The index has remained below the 50.0 threshold for the sixth straight month and the latest decline marked the biggest fall since the national lockdown in January 2021.

"Weaker than expected PMI numbers in January underscore the risk of the UK slipping into recession," Chris Williamson, chief business economist at S&P Global Market Intelligence, 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," Williamson added.

Read more: UK Wage Pressures Rise Further

In the latest economic forecast, the think tank EY ITEM Club forecast the UK economy to undergo a deeper recession than previously projected due to high inflation, falling real incomes, rising interest rates and tight fiscal policy.

The economy is expected to shrink 0.7 percent this year, but expand 1.9 percent next year.

The latest CIPS PMI data showed that the overall faster fall reflected a weaker service sector performance, with activity easing the most in 24 months. At 48.0, the services Purchasing Managers' Index fell from 49.9 in December. The score was forecast to fall moderately to 49.6.

Meanwhile, the manufacturing PMI rose to a four-month high of 46.7 from 45.3 in the previous month. Economists had forecast the index to rise slightly to 45.4.

There was a sustained reduction in new work, but the pace of decrease was the softest since August 2022. The moderate fall in new work contributed to less pressure on capacity. Backlogs of work decreased for the third successive month.

Read more: UK Lenders To Tighten Credit Conditions In Q1

Employment decreased at a fractional pace. Cutbacks to staffing levels were most prevalent in the manufacturing sector, whereas service providers recorded a slight uplift in employment.

Turning to cost pressures, the survey showed a slowdown in inflation. Input cost inflation slowed to the lowest since April 2021. Average prices charged by private sector companies rose at the weakest rate since August 2021.

Business expectations for the year ahead improved notably in January as both manufacturers and service providers hope improvement over the course of 2023.

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