UK downturn moderates in December but recession begins

The downturn across most British businesses eased slightly this month but manufacturers struggled and the economy is still likely to contract this quarter, marking a recession, a survey showed on Friday.

The UK S&P Global Composite Purchasing Managers' Index (PMI) rose unexpectedly to 49.0 from 48.2 in November, although it remained below the 50 threshold for growth. A Reuters poll of economists had pointed to a slight fall to 48.0.

The dominant services sector drove all the improvement as the decline deepened among British manufacturers, which cut jobs for the first time since October 2020.

The survey echoed other signs that the economy is contracting at a slow pace that is not worsening, with price pressures easing further from historically high levels.

Separate data on Friday showed a surprise fall in retail sales in November, while consumer confidence remained close to all-time lows this month.

"The releases still point to the UK being in a shallow, but protracted, recession at the end of 2022 and into 2023," said Daniel Mahoney, UK economist at Handelsbanken.

Composite PMIs from other European countries painted a similar picture, although Britain's reading bettered those of France and Germany for the first time since July.

It came a day after Bank of England officials raised interest rates and indicated that more hikes were likely, despite a looming recession, as the central bank tries to bring down inflation that hit a 41-year high in October.

However, investors took the message from the BoE to be that it might be approaching the end of its rate hikes.

S&P Global said the PMI was consistent with a roughly 0.3% drop in economic output in the fourth quarter. On Thursday, the BoE said it expected a smaller 0.1% fall in the period.

The economy shrank by 0.2% in the July-September period, according to official data.

The composite PMI's gauges of inflation for both businesses' input cost and their selling prices fell to their lowest levels since mid-2021.

The PMI for the services sector rose to 50.0, indicating stagnation, from 48.8 in November.

Factories, which account for less than 10% of Britain's economic output, fared worse. The manufacturing PMI slid to 44.7 from 46.5, marking its lowest level since May 2020 - during the depths of the first COVID-19 lockdown.

"It's no surprise to see that businesses are battening down the hatches, most notably by reducing headcounts, in a sign that the downturn not only has further to run but could yet accelerate again, especially given December's further hike to interest rates," S&P Global Chief Business Economist Chris Williamson said.