Britain’s policymakers are on high alert as a key measure of economic health reveals a Europe-wide decline in private sector activity. This slowdown, possibly triggered by higher interest rates and inflation, is most pronounced in the UK, marking the weakest performance since the early 2021 Covid lockdown.
The Eurozone is experiencing a similar downturn, with activity hitting its lowest point since November 2020. Germany, the Eurozone’s largest economy, is particularly impacted by a drop in demand for its manufactured goods.
While the United States has shown more resilience compared to Europe, even the world’s largest economy is displaying signs of strain. Activity levels in August approached stagnation, reaching their lowest point in six months.
These warnings of impending economic challenges have emerged from surveys of purchasing managers, known for their reliability in predicting future economic trends. These surveys use a threshold of 50, with values below indicating contraction.
In the UK, the Purchasing Managers’ Index (PMI), conducted by S&P and the Chartered Institute of Procurement and Supply, fell from 50.8 in July to 47.9 in August. The service sector’s PMI decreased from 51.5 to 48.7, while the manufacturing PMI dropped from 45.3 to 42.5.
Jennifer McKeown, Chief Global Economist at Capital Economics, stated that these August PMIs support the view that the Eurozone and the UK are at risk of slipping into recession in the third quarter, while the US is barely experiencing growth. These surveys suggest that monetary tightening cycles may have peaked.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, highlighted the challenges companies are facing due to the UK’s cost of living crisis, reduced export demand, higher interest rates, and economic uncertainty. Inflation is expected to drop from 6.8% to 4% in the coming months. The data also adds to speculation that interest rates may soon reach their peak.
In the Eurozone, the PMI, conducted by Hamburg Commercial Bank (HCB), indicates a decline in overall business activity from 48.6 in July to 47.0 in August. The services PMI dropped from 50.9 to 48.3, while the manufacturing PMI showed a slight increase from 42.7 to 43.7.
Cyrus de la Rubia, Chief Economist at HCB, pointed out that the Eurozone’s service sector is now aligning with the underperformance of manufacturing. Service companies reported a contraction in activity for the first time since the end of the previous year, while manufacturing output continued to decline. These figures suggest that the Eurozone may contract by 0.2% in the third quarter, according to the bank’s GDP nowcast.
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