Factory slump drags UK economy close to stagnation in August – business live | Business

Just in: A slump in factory output has dragged the UK private sector to near stagnation this month.

Growth in Britain’s private sector slowed to a crawl in August as factory output fell and growth in the larger services sector slowed, according to the latest survey of purchasing managers at UK firms.

Companies reported muted customer demand as well as shortages of both labour and inputs, adding to signs that a downturn is looming.

The closely-watched flash UK composite PMI, which tracks the private sector economy, fell to an 18-month low of 50.9, down from July’s 52.1, near to stagnation.

UK manufacturers reported the sharpest fall in production since May 2020, when the economy was in its first Covid-19 lockdown. Factories blamed reduced customer demand, the delayed delivery of inputs and labour shortages.

The Flash UK manufacturing PMI sank to just 46.0, a 27-month low, down from 52.1 (A reading below 50 shows activity fell).

That will add to concerns that the UK is sliding towards recession, after the economy contracted in the April-June quarter.

Annabel Fiddes, economics associate director at S&P Global Market Intelligence said:

“The UK private sector moved closer to stagnation in August, as mild growth of activity across the service sector only just offset a deepening downturn at manufacturers.

Waning customer demand amid the weaker economic outlook, and shortages of both staff and inputs, were reported to have hit goods producers hard, with firms registering the quickest drops in output and new work since May 2020.

Excluding the initial phase of the pandemic in early-2020, the reduction in manufacturing output was the quickest seen since the start of 2009. Meanwhile, the service sector registered the weakest increase in activity since the recovery began in early 2021.

The downturn in Germany’s private sector economy has deepened too.

The Flash Germany PMI Composite Output Index has fallen to just 47.6 this month, from July’s 48.1.

That indicates German’s private sector is contracting at the fastest rate in 26 months, with manufacturing output and services activity both dropping.

German companies blamed the deepening downturn on rising uncertainty, high inflation and rising interest rates, all of which weighed notably on demand.

New business fell for the third month running, while new export sales fell at the fastest rate in over two years.

The PMI data “paint a bleak picture of the German economy”, says Phil Smith, Economics Associate Director at S&P Global Market Intelligence:

Continued weakness in manufacturing is being compounded by a slowdown in the service sector, with surveyed businesses reporting a growing strain on demand from high inflation and increased interest rates.

“The slowdown in the economy is increasingly taking a toll on firms’ hiring activity, with employment growth easing to its weakest for almost a year-and-a-half in August. A first fall in backlogs of work for more than two years points to capacity pressures across Germany’s private sector economy starting to ease and represents a downside risk to job creation going forward.

“Positively, August’s data provided evidence of a further easing of both supply side constraints and cost increases, which helped to lift business confidence from July’s recent low. However, with the threat of an energy crisis still looming large, the outlook remains riddled with uncertainty.”

Here’s the details (any reading below 50 shows a contraction).

• Flash Germany PMI Composite Output Index at 47.6 (July: 48.1). 26-month low.

• Flash Germany Services PMI Activity Index at 48.2 (July: 49.7). 18-month low.

• Flash Germany Manufacturing Output Index at 46.4 (July: 45.0). 2-month high.

• Flash Germany Manufacturing PMI at 49.8 (July: 49.3). 2-month high.

The French economy contracted in August for the first time since Covid disruption hit the eurozone’s second-largest economy 18 months ago.

Data provider S&P Global reports that French private sector activity is falling this month, driven by a downturn in manufacturing and slower service sector growth.

Falling demand hit output, with purchasing managers at French firms reporting the biggest drop in new business since November 2020.

High inflation and a waning post-Covid boost to demand has led businesses and consumers to cut back on discretionary spending.

This led to a slowdown in employment growth, and knocked business confidence to its lowest in almost two years.

Here’s the details:

• Flash France PMI Composite Output Index at 49.8 (Jul: 51.7). 18-month low.

• Flash France Services PMI Activity Index at 51.0 (Jul: 53.2). 16-month low.

• Flash France Manufacturing Output Index at 44.4 (Jul: 44.6). 27-month low.

• Flash France Manufacturing PMI at 49.0 (Jul: 49.5). 27-month low.

Joe Hayes, senior economist at S&P Global Market Intelligence, warned that high inflation is hitting France’s economy:

European economies look set for a challenging run into year-end and France is no exception.

High inflation has squeezed purchasing power among consumers and businesses alike, although we saw further signs to suggest we have passed peak price pressures.

Nevertheless, inflation remains elevated and businesses reported more and more clients being deterred from placing orders due to the current price level. The downward trend in the France PMI may well persist now demand for goods and services is falling.”

Japan’s private sector output has fallen for the first time in six months, as companies were hit by rising costs of energy and raw materials, and weakening global demand.

The au Jibun Bank Flash Japan Composite PMI, which measures activity across the manufacturing and services sectors, has dropped to 48.9 this month, from July’s 50.2 final. Any reading below 50 shows a contraction.

Activity in the services sector fell for the first time in five months, while Japan’s factory activity growth slowed to a 19-month low in August as output and new order declines deepened.

Usamah Bhatti, economist at S&P Global Market Intelligence, adds:

“Business confidence eased to the joint-lowest for five months during August amid the growing economic headwinds.

The strongest concerns among Japanese private sector firms were the impact of the Ukraine war, inflationary pressures due to rising raw material and energy costs, and a global economic slowdown.”

Britain’s second biggest airport has returned to profit, thanks to the easing of travel restrictions this year.

And in a boost to passengers, Gatwick says it doesn’t need to extend capacity curbs beyond the end of August as it returns to its usual business operations.

Gatwick made an EBITDA profit of £148.3m in the first half of 2022, and a profit after tax of £50.6m.

That’s a turnaround on 2021, when Gatwick reported a £244.6m loss for first six months and negative EBITDA at -£50.2m.

It also lifted its passenger forecast despite the travel chaos that disrupted many holidays, and now expects 32.8m passengers in 2022.

However, Gatwick also warned that inflationary pressures on costs, and passenger demand for the winter season may impact these forecasts.

Gatwick adds that it doesn’t plan any “further moderation of flying programmes”, having recruited over 400 new security staff to reduce delays. Back in June, it cut its summer capacity to avoid the last-minute cancellations that wrecked some holidays over the Jubilee and half-term break.

Stewart Wingate, chief executive officer of Gatwick Airport said demand has ‘bounced back’:

“We still have some considerable way to go, but strong demand has fast-tracked Gatwick’s recovery from the pandemic, particularly in the last quarter since all UK travel restrictions were removed. Air traffic volumes have reflected this strong passenger demand and have bounced back to around 75% of pre-COVID levels.

“The unprecedented growth in traffic lead to short term operational issues in June, however our decisive early action to limit the airport’s capacity in the crucial school holiday period of July and August has ensured passengers have experienced reliable flight timetables over the summer months.

We are now very much operating business as usual and do not see any reason to extend the capacity declaration.”

The UK’s National Grid has doubled the size of its regular emergency planning drill, at a time when fears of energy supply shortages are rising.

The emergency gas shortage planning exercise, in which various scenarious including electricity rationing are war-gamed, will run for four days instead of the usual two, the BBC reports this morning.

Here’s the details:

The government insists there is no risk to UK energy supplies and consumers should not panic.

But industry say ministers need to do more to secure supplies this winter.

The National Grid exercise, which gets under way next month, will involve government agencies, regulators, lobby groups and major energy firms.

Called Exercise Degree, it will simulate scenarios in which a loss of gas supply triggers an emergency situation for the UK’s energy system.

The BBC also reports that business Secretary Kwasi Kwarteng does not appear to have sought any advice from government officials on the possibility of rationing energy – a BBC Freedom of Information request found he had not done so before the end of June.

Sterling is also under pressure against the US dollar this morning.

The pound has dropped by almost half a cent to $1.172 against the dollar, the weakest since March 2020 (when the Covid-19 pandemic rocked global markets).

Britain’s surging energy costs and weakening economy have weighed on the pound, with families facing rocketing energy bills.

As Jane Foley, head of FX strategy at Rabobank in London, explained yesterday:

“The weak UK growth outlook continues to weigh on the pound. News that Ofgem is set to announce on Friday that UK average annual household energy bills are likely to rise to more than £3,500 pounds reinforces the headwinds facing consumers.”

European gas prices are being driven higher by concerns over supplies from Russia (Gazprom has cut flows through Nord Stream 1 pipeline this summer), and also rising demand.

On the latter point, James Huckstepp, head of EMEA gas analytics at S&P Global Commodity Insights, explains:

The recent hot, dry, and relatively still (non-windy) weather is as bullish as it gets for summer gas demand.

This translates to high air-conditioning load, low hydro-generation (along with other nuclear and coal fired generation issues that come along with low-river levels), and then relatively low wind generation.

Regarding price-driven demand destruction—although it is visible both in the data and anecdotally—this may have plateaued for the time being.

Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.

The euro has sunk to a fresh two-decade low as surging gas prices fuel concerns over the eurozone economy.

The single currency has dropped as low as $0.991 against the US dollar this morning, its weakest point since 2002, as fears of a European recession and more aggressive US interest rate rises both rattle the markets.

The euro came under renewed pressure as wholesale energy prices rocketed on Monday, after Russia announced it would halt natural gas supplies to Europe via the Nord Stream 1 pipeline for three days at the end of the month, for maintenance.

Last night, the benchmark European gas price settled at its highest closing price on record, having surged during August on fears that Moscow is squeezing energy supplies.

Europe’s benchmark electricity price jumped more than 25% on Monday to pass €700 per megawatt-hour for the first time, around 14 times the seasonal average over the past five years.

Jim Reid of Deutsche Bank told clients that the energy crisis had intensified.

Starting in Europe, the energy crisis intensified yet further, after news over the weekend that Nord Stream would be shut for maintenance at the end of the month introduced fresh fears it would not re-open.

European natural gas prices ratcheted +14.59% higher to €280/MWH, a record high. German power prices surged +18.60% to another record as well, closing at €663 and breaching €700/MWH intraday for the first time ever.

This summer’s heatwaves have already strained Europe’s energy supplies. Such high prices will hurt households badly, while disruption during the winter months could be devastating for business activity.

Tapas Strickland, a director of economics at National Australia Bank, says:

“Europe’s dire energy situation suggests the peak of inflation is not here yet and the risk remains that high inflation is sticky for longer without further aggressive central bank action.

“No surprise then to see the dollar at near multi-decade highs against a falling euro and British pound.”

While energy shortage fears hit the euro, the dollar is in demand. Traders are anticipating the Federal Reserve will continue to lift US interest rates to battle inflation, despite the slowdown in the global economy.

Wall Street saw its worst day since June last night, with the Dow Jones Industrial Average dropping 2% as the summer rally fizzled out.

Also coming up today

The latest surveys of purchasing managers across Europe will show the damage caused by soaring energy prices and extreme weather this summer, including low water levels on the Rhine.

August’s flash purchasing managers surveys are expected to show that eurozone factories shrank again this month, while the services sector struggled.

Michael Hewson of CMC Markets has the details:

Surging energy prices, along with sharply declining water levels on the Rhine have cut the rug out from the manufacturing sector in Germany with today’s August flash PMI expected to see a further decline from 49.3 to 48, while services activity is also expected to slip further from 49.7 to 49.

In France the picture isn’t any better, although the services sector is benefitting from a bit of a tourism boost, however the forest fires could well pull economic activity here down quite a lot more. In manufacturing economic activity is likely to slip to 49, from 49.5, while services could slip from 53.2 by a lot more than the 53 that is currently being forecast.

In the UK, the picture is slightly better, but the PMI survey could show a slowdown in growth.

With August being a slow period due to holidays, we could well start to see economic activity on the PMI level start to slide into contraction territory, from 52.1 for manufacturing in July and from 52.6 for services in July.

The agenda

• 9am BST: Eurozone flash manufacturing and services PMI survey for August

• 9.30am BST: UK flash manufacturing and services PMI survey for August

• 11am BST: CBI survey of industrial trends

• 2.45pm BST: US flash manufacturing and services PMI survey for August

• 3pm BST: Eurozone consumer confidence survey for August

• 3pm BST: US new home sales for July