Is Britain heading for a painful recession?

Given how inflation has taken off and sent real incomes into steep decline it is remarkable that Britain is not already in recession. It seemed that we were heading that way – until the Office for National Statistics revised upwards economic growth in the second quarter of this year from minus 0.1 per cent to plus 0.2 per cent. The economy then shrank by 0.3 per cent in August. But the definition of a recession is two quarters of negative growth – so Britain cannot be classed as being in one until growth figures for the fourth quarter are published in January.

But the S&P Global Purchasing Managers’ Index (PMI) published today suggests that when it does finally arrive, the recession will be deep and painful. A PMI – a concept which is calculated and published by several organisations – is a leading indicator of economic growth. It is compiled from data submitted by businesses on whether their activity is rising or falling. The data is then aggregated to give a single score out of 100. Anything higher than 50 represents growth in the economy; anything below, contraction.

The UK’s S&P Global PMI for October is put at 47.2, significantly lower than the market expectations of 48.2 – and the lowest since January last year, the beginning of the third Covid lockdown. And lockdowns aside, it is the lowest figure recorded since March 2009 – when Britain was in the depths of the financial crisis. Manufacturing, at 45.8, is especially low, with the outlook deteriorating sharply in the past month; it was 48.4 in September. And the services element of PMI is in negative territory for the first time in 20 months.

The one piece of good news in today’s report was job creation. Businesses are still hiring more people than they are firing (although the rate of job creation was at its lowest since February last year). However, the cheer did not extend to the manufacturing sector, which suffered a net loss of jobs for the first time since December 2020. Even so, the employment market remains something of a conundrum. In past recessions, unemployment has risen quickly. Now, employment seems to hold up remarkably well: perhaps that is a sign of a more flexible jobs market. But go back to the recession of the early 1980s, for example, and large factories were closing – which in many cases has been a town’s dominant employer for decades. There are far fewer employment monocultures than in the past.

While the S&P PMI indicates a deep recession, if large falls in employment can be avoided then it will mitigate considerably the pain experienced by individual households – and lessen the impact of the recession on the welfare budget.