Decline in industry shrinks British economy

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Decline in industry shrinks British economy
© Reuters. FILE PHOTO: Smoke rises from factories in Rugby, Britain on February 10, 2021. REUTERS/Matthew Childs

War David Milligan

LONDON, Aug 23 (Reuters) – The British economy is at risk of contracting in the current quarter and slipping into recession, a survey on Wednesday showed broader weakness amid a decline in factory output and a rise in interest rates.

The S&P Global/CIPS purchasing managers’ index (PMI) fell to 47.9 in August from 50.8 in July, according to a preliminary estimate that was below all forecasts in a Reuters poll of economists.

The reading was the lowest since January 2021 when the UK was in COVID-19 lockdown. It was the first drop below the 50 level that separates growth from contraction since January this year.

The British economy – with high inflation and the aftermath of the coronavirus pandemic and Brexit – shrank for the first time in the third quarter of 2022, with many businesses closing for Queen Elizabeth’s funeral. Since then, it has defied widespread recession forecasts but grown slowly.

Chris Williamson, chief business economist at S&P Global Market Intelligence, said the PMI pointed to a 0.2% drop in overall economic output in the three months to the end of September.

“The fight against inflation has high costs in terms of increased risks of recession,” he said.

The Bank of England has raised interest rates 14 times since December 2021, to 5.25%, the highest level in 15 years. Financial markets expect a new hike in rates to 5.5% in September and estimate that rates will peak at 6% for the rest of the year.

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British inflation has been slowing since reaching 11.1% last year, the highest level in 41 years, before it was 6.8%, the highest level among major economies, in July.

However, Williamson said he expected it to drop to 4% “in the coming months”. The Bank of England said earlier in the month that it only saw inflation below 4% from the second quarter of 2024.

Overall business confidence for the coming year fell to an eight-month low, but remained in line with the pre-pandemic average.

(Reporting by David Milligan; Editing by William Schomberg and Hugh Lawson (TYO:); Editing in Spanish by Flora Gomez.

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