Private sector business activity in the UK suffered its sharpest drop in two years this month, as the risk of Britain falling into recession intensifies, according to influential figures.
Preliminary data from the so-called flash purchasing managers index (PMI) showed that the downturn in the UK economy in January was worse than expected.
The monthly survey, compiled by S&P Global and the Chartered Institute of Procurement & Supply (CIPS), showed a reading of 47.8 in January, a drop from the 49 recorded in December and coming in below the market consensus of 48.8.
Any score below 50 is considered a contraction for the economy, and the latest data marked the sixth month in a row that the economy has declined.
It also represented the fastest rate of decline since the national lockdown in January 2021.
The survey revealed that higher interest rates and low consumer confidence are key factors holding back business activity this month.
This is particularly the case for the services sector – which includes retailers and hospitality businesses like restaurants, pubs and hotels – which saw business activity fall steeply month on month.
Private sector businesses are battling to make money against squeezed household incomes, and a drop in business investment from risk-averse corporates, the survey found.
The manufacturing sector also saw output drop considerably in January, with the sector continuing to face severe labour shortages and inflated costs, coupled with weaker demand.
Chris Williamson, chief business economist at S&P Global Market Intelligence, said: “Weaker-than-expected PMI numbers in January underscore the risk of the UK slipping into recession.
“Industrial disputes, staff shortages, export losses, the rising cost of living and higher interest rates all meant the rate of economic decline gathered pace again at the start of the year.
“Jobs also continued to be lost as firms tightened their belts in the face of these headwinds, though many other firms reported being constrained by an ongoing lack of available labour.”
However, it was not all doom and gloom as cost pressures have continued to ease and businesses reported feeling more optimistic in the latest survey than they have been for eight months.
Lower fuel bills, commodity prices and shopping costs offset wage pressures in January, meaning that business expenses have begun to come down and cost inflation dropped to levels seen in spring 2021.
Both the manufacturing and services sectors were hopeful that the global economy will improve this year and UK inflation will drop, which led to higher levels of confidence.
But S&P Global warned that the index still marks a disappointing start to the year.
Mr Williamson said: “There were some bright spots in the survey, including improved business expectations for the year ahead and a further cooling of inflationary pressures.
“But this is undeniably a disappointing start to the year for the UK, reflecting not just short-term hits to growth such as strike action and the rise in energy costs due to the Ukraine war, but also highlighting the ongoing damage to the economy from longer term structural issues such as labour shortages and trade woes linked to Brexit.”
Sir Jon Glen, chief economist at CIPS, said the country “teeters on the precipice of recession” but optimism levels hint that the downturn may not be as long and protracted as feared.