Britain is heading for an industrial recession, bosses warn, as interest rates rise

Britain is headed for an industrial recession as interest rates rise and hit factories, bosses have warned.

Higher borrowing costs are sending the manufacturing sector into a tailspin, crushing output and employment in an already struggling sector according to the purchasing managers’ index (PMI).

The influential S&P Global survey shows that manufacturing activity fell last month at the steepest pace so far this year.

Fhaheen Khan, senior economist at manufacturing industry group Make UK, said the PMI shows “the economy is on a path of anemic growth with industry now at risk of facing recession.”

Inflationary pressures are easing as the sector turns around and suppliers have to compete more for business, while manufacturers have stopped raising prices for customers. At the same time, “the rate of job losses accelerated to a seven-month high,” S&P Global said.

It indicates that the Bank of England is making progress in slowing down inflation through higher interest rates, at the price of an industrial recession. So far, Andrew Bailey, the bank’s governor, and his colleagues have raised interest rates from 0.1% to 5% in a strong series of increases since December 2021. They are expected to rise to 5.25 % Thursday.

Alex Brazier, a former bank executive, warned that a recession may be needed to bring inflation back under control.

“Inflation has now taken hold and, to be honest, taking inflation to 2%, the Bank’s target, probably means a further slowdown in growth or a recession and higher unemployment,” he told BBC Radio Four.

“The trick for the Bank is to do it in the most moderate way possible.”

The overall PMI score fell to 45.3 in July, down from 46.3 in June. It has not been lower since May 2020, in the depths of the first Covid lockdown.

Any PMI below 50 indicates a drop in business activity, so it shows that the contraction in the sector is accelerating.

Thomas Pugh, an economist at RSM, warned of a broader fall as the impact of rising interest rates spreads across more of the economy.

“The fall in the manufacturing PMI suggests momentum and resilience in the private sector is beginning to falter and it is not hard to see the economy slipping into recession in early 2024 as the impact of interest rate hikes continues to affect the real economy. ,” he said.

The situation is even more serious in the eurozone. Its manufacturing PMI fell to 42.7, its lowest level in more than three years.

Germany led the decline among the largest economies with a PMI of 38.8, followed by Italy at 44.5 and France at 45.1, all pointing to significant contractions.

Claus Vistesen of Pantheon Macroeconomics said that “the eurozone industrial sector was in dire straits at the beginning of the third quarter.”

“There is no way to sugarcoat this data. New orders and production in euro zone manufacturing are now falling at their fastest pace since the financial crisis, not counting the collapse in activity during the Covid lockdown,” he said, noting that exports are plummeting. and employment fell for the second month in a row.

Headline employment in the eurozone held firm at 6.4%, according to Eurostat, with unemployment in Germany stable at 3%, France stable at 7.1% and Italy falling from 7.5%. in May to 7.4% in June.