New figures out today [6] confirm that the UK economy has ground to a halt. With inflation running high and our labor market still tight, those fears are creeping back in. Most notably, the service sector exhibited a notable weakness, as the PMI for the Purchasing Managers’ Index (PMI) fell off a cliff. This decline reflects a broader trend of subdued demand and heightened operational costs that many UK businesses are struggling to navigate.
And in July, the service sector PMI fell to 51.2 from 52.8. This drop is a clear sign of a notable increase in growth momentum as the overall economy roars into the third quarter. New orders dropped on the month. Due to this, businesses were telling us they would need to lower headcount in order to deal with increasing payroll expenses. This decision is made against a backdrop of increasing price pressures that have recently started to seep into the real economy.
Inflation and Economic Outlook
For example, UK economists have recently warned that inflation in the UK could stay high for many years, making the economic recovery all the more difficult. The Bank of England’s repeated attempts to nip inflation in the bud could be undermined as price pressures continue to build. Input price inflation has increased after falling to a six-month low in June. This massive upturn has led many to question the sustainability of consumer spending and economic growth.
With inflation still the paramount concern, UK yields can only start to go down. Bond traders are pricing in a level of entrenched and lasting weakness within the UK economy, so the outlook remains very much up in the air. With declining yields and growing stubborn inflation, investors are more risk-averse than ever before. Few are willing to sign on for the long haul in such a boom-or-bust market.
Labor Market Strains
The softening of the labor market continues to make its presence felt, with net change in employment falling at the fastest rate since February. With costs skyrocketing, private businesses have already begun to lay off employees as a strategy to safeguard cash flow. When surveyed, companies reported that they’re having trouble even keeping headcount as they deal with muted demand and rising costs to operate.
This tells the public sector a very powerful message from the private sector. Firms are running out of time to adjust to the need for a different post-pandemic economy. Many businesses are exploring strategies to reduce costs, including potential layoffs, as they confront the dual challenges of rising inflation and stagnant growth.
Business Sentiment and Future Taxation
The July PMI data was another sign of the stormy waters ahead on the horizon for UK businesses. Now they need to get ready for another tax raid later this year as politicians cope with growing fiscal pressures. Such a move would only add to the financial pressure being heaped on private businesses already dealing with elevated cost pressures.
Declining new orders coupled with a sharp increase in operating expenses are creating major challenges for businesses. These conditions have conspired to produce an unusual level of uncertainty about future economic prospects. Combined with weakening service sector performance and rising inflation, this makes for a very precarious environment. This new, additional employer burden places financial and philosophical pressure on employees themselves.