The UK economy is “grinding to a halt” as a tightening cost of living squeeze sends a chill through private sector activity, reveals a closely watched survey.
Households are cutting spending in response to rampant inflation eroding their budgets, weighing heavily on the UK’s services sector, the country’s economic engine.
Activity among services firms dropped to a 15-month low of 51.8 in May, below the City’s expectations and down sharply from April’s strong reading of 58.9 April, according to S&P Global’s latest purchasing managers’ index (PMI).
A reading above 50 indicates most firms reported growing activity.
That drove overall activity in the UK’s private sector economy also to a 15-month low, according to the PMI.
There is growing concern Britain is hurtling toward a recession due to living costs accelerating much quicker than forecast at the start of the year.
The survey indicates the “economy [is] almost grinding to a halt as inflationary pressure rises to unprecedented levels,” Chris Williamson, chief business economist at S&P Global Market Intelligence, said.
Inflation is forecast to climb above 10 per cent after the summer, sparked by the energy watchdog raising the cap on bills again to account for higher wholesale oil and gas prices caused by Russia’s invasion of Ukraine.
It is already running at a four decade high of nine per cent.
These projections, alongside weakening business confidence, indicate “that [the] worse is to come,” Williamson added.
Data published by the Office for National Statistics earlier this month revealed the economy shrunk 0.1 per cent in March, indicating output was under pressure even before the cost of living crunch intensified.
The PMI is a more timely measure of the country’s economic health, suggesting GDP could reverse again in the coming months.
Services firms’ costs swelled at the fastest rate on record this month, with rising wage bills one of the biggest contributing factors.
The Bank of England has warned ongoing wage pressures emanating from the jobs market poses the greatest risk to elevated inflation embedding in the UK economy over the long-run.
Private firms’ profitability is coming under pressure from weaker consumer demand.
“There were some reports suggesting that more subdued customer demand had led to squeezed margins and greater caution about passing on rising costs during May,” S&P Global said.