The UK political storm that prompted Prime Minister Liz Truss to step aside is intensifying a downturn in the economy and darkening the outlook for businesses.

S&P Global’s survey of private sector purchasing managers fell to 47.2 in October, well below the 48.1 reading economists had expected and deeper into territory indicating a contraction.

The worst reading for expectations in the year ahead since the start of the pandemic suggests the economy will shrink in the fourth quarter, the research company said Monday.

The figures indicate the mounting cost of the implosion of Truss’s government after her plan to slash taxes backfired, causing a plunge in the value of the pound and UK bonds. S&P said that excluding the pandemic, output is now falling faster than at any time since the global financial crisis in 2009.

“The pace of economic decline gathered momentum after the recent political and financial market upheaval,” said Chris Williamson, Chief Business Economist at S&P Global Market Intelligence. “GDP looks certain to fall. The UK is in recession.”

What Bloomberg Economics Says…

“The steep drop in UK’s flash composite PMI in October shows underlying growth weakened further. This supports our view that the economy is in the midst of a recession – as tighter funding conditions add to the cost-of-living crisis, squeezing real incomes. That will help the Bank of England tame medium-term price pressures, but sky-high inflation today and the need to maintain confidence in UK assets mean a jumbo hike of 75-bps is likely in November.”

–Ana Luis Andrade, Bloomberg Economics.

The report’s conclusion is unusual in directly blaming political leaders for the dimming prospects for the economy. Truss last week resigned as leader of the ruling Conservative Party, triggering a leadership contest that will bring a third prime minister to office this year.

The survey said higher borrowing costs and uncertainty about the political situation were weighing on company executives. Manufacturers showed a particularly steep drop in output, suggesting they’re not benefiting from the pound’s decline against the dollar and euro.

“Business confidence has collapsed, sliding to a level rarely seen before in 25 years of survey history,” Williamson said. “As night follows day, investment and employment will suffer as companies adjust to the increasingly challenging environment. Hiring is already slowing sharply.”

© 2022 Bloomberg



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