Rising Concerns Over United Kingdom Recession FY23, 24, As Companies Trim Workforce Significantly

Private sector companies in the United Kingdom are shedding jobs at an alarming rate, marking the swiftest workforce reduction since the onset of the pandemic and the depths of the financial crisis, hence stressing the Bank of England’s recent decision to put the brakes on interest rate hikes for the first time in nearly two years.

The composite Purchasing Managers’ Index (PMI) by S&P Global plummeted to 46.8 in September, down from 48.6 the previous month; the decline in output is the steepest since January 2021 when the UK was in lockdown, and it surpassed economists’ expectations and plunged the private sector deeper into contraction territory.

The BOE cited this survey as evidence of the UK’s already faltering economy, leading to their decision to maintain interest rates at 5.25%, and economists believe this may indicate that borrowing costs have temporarily peaked.

This PMI data adds to a growing list of indicators pointing toward a lackluster second half of the year for the UK economy. 

August’s retail sales data, released on the same day, showed a smaller-than-expected rebound, suggesting that retail activity might drag down gross domestic product figures for the third quarter unless there is a significant improvement in September.

Job Cut Woes

S&P also highlighted an “abrupt turnaround” in the job market, with job cuts occurring at the fastest rate since October 2009, excluding the pandemic-related lockdowns. 

This closely-watched survey raises concerns that the UK may be entering a downturn just over a year before the next election, posing challenges for Prime Minister Rishi Sunak’s government, which is currently lagging in polls and seeking to stimulate economic growth before the upcoming elections.

The PMI readings have indicated a second consecutive month below the critical 50-point threshold that separates growth from contraction, suggesting a potential GDP downturn. The weakening performance in the UK’s largest services sector has had a notable negative impact on overall economic activity.

However, signs of loosening in the labour market are boosting confidence that the Bank of England’s efforts to combat inflation are starting to yield results.

UK Predicted to Have Highest Inflation Among Major Economies in 2023, Says OECD

According to forecasts by the Organisation for Economic Co-operation and Development (OECD), the United Kingdom will experience the highest inflation among leading developed economies in 2023, and the inflation issue appears to be worsening compared to most of its peers.

The forecast indicates that the UK’s headline inflation rate for 2023 is expected to average 7.2%, up from a previous OECD estimate of 6.9% made in June. 

This adjustment represents the most significant upward revision among Group of Seven (G7) economies, aside from Japan, in the latest set of projections. It also surpasses Germany‘s expected inflation rate of 6.1% and France‘s 5.8%, both of which have been lowered compared to the OECD’s June forecasts.

The Political Tightrope

Prime Minister Rishi Sunak has committed to halving inflation by the end of this year, ahead of an expected election in 2024. 

This means that inflation would need to decrease from its current level of approximately 7% to around 5% in December compared to the same month in the previous year.

The OECD’s updated projections suggest that achieving this target will be a close call, as British inflation is projected to slow to 2.9% in 2024, on par with France and slightly lower than Germany’s 3.0%.

Finance Minister Jeremy Hunt expressed optimism about the OECD’s expectations, saying, “Today, the OECD has presented a challenging global outlook, but it is encouraging that they anticipate UK inflation to drop below 3% next year.”

The persistently high inflation rate in the UK has prompted the Bank of England to raise interest rates 14 times in a row since December 2021. 

While it is expected to increase the Bank Rate again to 5.5% from its current 5.25%, economists and investors are beginning to speculate that this could mark the last rate hike in the BOE’s efforts to combat inflation risks in an economy that is showing signs of slowing.

The OECD’s forecasts indicate that the UK’s economic growth in 2023 is expected to be 0.3%, unchanged from their June prediction, marking it the second weakest performance among developed economies after Germany. 

In 2024, the UK’s economy is forecasted to expand by 0.8%, which is tied for the weakest growth rate with Italy among these economies.

UK Labor Market Shows Signs of Cooling Amid Record Pay Growth

After defying economic gravity for several months, the UK’s labour market is finally feeling the impact of prolonged stagnant growth. 

The latest report from the Office for National Statistics (ONS) reveals unmistakable indicators of weakness: declining employment and job vacancies alongside rising unemployment and redundancies. 

These shifts in the labour market are seen as evidence of the impact of the 14 interest rate hikes initiated by the Bank of England since December 2021. 

While monthly employment figures warrant caution, the abrupt drop of 567,000 in employment in June alone cannot be ignored.

Despite a recent increase in the number of people inactive due to long-term sickness, more individuals have been actively seeking employment, driven by the strain on household budgets resulting from the cost of living crisis. 

This convergence of weaker labour demand and a surge in the workforce has pushed the unemployment rate up by 0.3 percentage points to 4.2% between the first and second quarters of 2023. In June, the jobless rate reached 4.6%.

One notable exception to this narrative of a cooling labour market is the remarkable annual pay growth, reaching 7.8%, the highest since modern records began in 2001; however, when including bonuses, this figure rises to 8.2%, although it’s primarily due to a one-off payment to NHS staff.

The question facing the Bank of England is whether this level of earnings growth can be sustained in an environment where jobs are becoming scarcer, as official earnings data typically reflects conditions from a few months prior, not the current demand for workers.

Samuel Tombs, a UK analyst at Pantheon Macroeconomics, suggests that wage growth usually lags behind changes in the labour market, implying that earnings growth may have peaked. 

Several survey indicators now point to a slowdown in wage increases; for instance, the net balance of recruiters reporting rising salaries for new hires hit a 27-month low in July and now falls below its second-half 2010s average, according to the Report on Jobs survey.

Even as the labour market trends downward, Tombs believes the Monetary Policy Committee (MPC) will raise rates from 5.25% to 5.5% in September. 

Ruth Gregory, a UK analyst at Capital Economics, shares this view; however, both experts anticipate this to be the peak as the risks associated with excessive interest rate increases continue to rise rapidly.

The Last Bit, The United Kingdom’s economic landscape is steering treacherous waters, with rising inflation and an impending recession casting a long shadow. 

The fast-paced job cuts in the private sector accentuate the fragility of the nation’s recovery, while the daunting inflation projections put pressure on the Bank of England to tread cautiously with further interest rate hikes. 

As political elections loom on the horizon, the government faces the formidable task of rekindling economic growth, and the coming months will be pivotal in determining whether the UK can steer itself away from the precipice of a severe downturn and back towards stability and prosperity.