UK economy ‘running on empty’ as post-pandemic order books dry up

Britain’s economy is starting to “run on empty” as post-pandemic order books dry up and the highest inflation in 40 years affects confidence, the latest snapshot of the private sector has shown.

Flash estimates of the economy’s performance in June showed business optimism at its lowest since the early months of the Covid pandemic in the spring of 2020 and the sharpest drop in new order volumes for a year.

The monthly survey of purchasing managers produced by S&P and the Chartered Institute of Procurement and Supply (Cips) said overall business activity across the services and manufacturing sectors was unchanged on the 15-month low of 53.1 reached in May.

A reading above 50 suggests private sector activity is expanding while a reading below 50 points to contraction.

Demand for labour remained strong despite weaker new business growth, with job creation the highest in three months.

Chris Williamson, chief business economist at S&P Global Market Intelligence said: “The economy is starting to look like it is running on empty. Current business growth is being supported by orders placed in prior months as companies report a near-stalling of demand.

“Manufacturers in particular are struggling with falling orders, especially for exports, and the service sector is already seeing signs of the recent growth spurt from pent-up pandemic demand move into reverse amid the rising cost of living.”

Meanwhile the monthly survey of high street spending from the CBI showed the Queen’s platinum jubilee celebrations failed to boost the fortunes of Britain’s struggling retailers as mounting cost of living pressures curbed spending power. Retail sales fell for a third month in June and retailers predicted another tough month ahead in July.

Although the employers’ organisation’s distributive trades survey didn’t include spending in bars and restaurants over the bank holiday weekend, separate snapshots of the economy provided further evidence of the UK’s cost of living crisis.

The CBI’s health check of retailing followed comments in the Daily Telegraph by the organisation’s outgoing president – Lord Karan Bilimoria – in which he said the UK was “definitely” heading for recession.

Ben Jones, a CBI economist, said: “Retail volumes are struggling as high inflation eats away at consumers’ budgets. The squeeze on household incomes appears to have offset any boost to activity from the extended platinum jubilee bank holiday earlier this month.

“There are also clearer signs that a downturn in consumer spending is beginning to ripple out across the wider distribution sector, with wholesalers seeing a 14-month period of robust sales growth come to a grinding halt this month.”

The annual inflation rate rose to 9.1% in May, and the flash estimates of the economy’s performance in June from S&P/Cips showed business optimism at its lowest since the early months of the pandemic in the spring of 2020 coupled with the sharpest drop in new order volumes for a year.

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A similar PMI for the eurozone showed a sharper slowdown than in the UK, with the composite measure of services and manufacturing dropping dropping from 54.8 to 51.9 in June. Williamson said that apart from months affected by pandemic-induced lockdowns it was the sharpest decline since the global financial crisis in 2008.

He said business confidence in the UK had now slumped to a level which in the past typically signalled imminent recession. “The weakness of the broad flow of economic data so far in the second quarter points to a drop in GDP which the forward-looking PMI numbers suggest will gather momentum in the third quarter”.