Flash UK PMI signals heightened economic downturn risk amid falling employment and rising inflation

The flash PMI data for December indicate that the UK economy remained largely stalled at the end of 2024, signalling a marked loss of growth momentum compared to earlier the year.

New orders have fallen in December for the first time in over a year, reflecting a deterioration in demand as a deepening downturn in manufacturing shows growing signs of spreading to the services economy.

Business confidence has meanwhile been hit further, sliding to a two-year low, as companies weigh up a gloomy outlook for sales alongside rising costs, notably for staff as a result of changes announced in the Budget. The survey's price indices are indicating that inflation is turning higher again.

Firms are responding to the increase in National Insurance contributions and new regulations around staffing with a marked pull-back in hiring, causing employment to fall in December at the fastest rate since the global financial crisis in 2009 if the pandemic is excluded.

While the December PMI is indicative of the economy more or less stalled in the fourth quarter, the loss of confidence and increased culling of jobs hints at worse to come as we head into the new year.

Economy close to stalling as demand falls

Business activity rose only marginally for a second successive month in December. The headline indicator from the flash PMI surveys, the seasonally adjusted S&P Global UK PMI Composite Output Index, held steady at 50.5, only just above the 50.0 no change level.

The December flash PMI reading is indicative of no change in GDP, rounding off a fourth quarter for which the survey has signalled a largely stalled economy.

Growth momentum has been lost since the robust expansion seen earlier in the year, which saw business report solid growth ahead of the General Election in the anticipation of a more settled political environment. However, the new government has since seen businesses and households respond negatively to its rhetoric and policy implementation in the past two months.

Although service sector growth ticked higher, it remained only very modest and the second-weakest recorded over the past 13 months. Manufacturing output meanwhile fell at an increased rate, dropping for a second successive month and recording the steepest decline for 11 months to signal a worryingly steep contraction by historical standards of the PMI survey.

With new orders falling for the first time in 13 months in December, a worsening demand environment is being reported, which indicates that risks are tilted to the downside for output as we head into the new year.

With new orders falling for the first time in 13 months in December, a worsening demand environment is being reported, which indicates that risks are tilted to the downside for output as we head into the new year.

Employment falls sharply as confidence slips further

Confidence in the 12-month outlook meanwhile deteriorated further in December, having already fallen sharply in prior months. Expectations of output in the year ahead fell to a two-year low.

Companies most commonly blamed the gloomier outlook on policy changes announced in the recent Budget, and in particular the rise in National Insurance contributions payable by employers, as well as concerns over the broader direction of government policy in the months ahead. Manufacturers also reported concerns over US protectionism and sluggish growth in export markets.

The drop in business confidence in the past two months - since the Budget - has taken sentiment well below its long-run average, albeit merely in line with the average seen between the 2016 Brexit vote and the start of the pandemic.

Employment fell sharply in December, with companies blaming the gloomier outlook and increase in staffing costs associated with the policy changes announced in the Budget. Particularly steep job cuts were seen in financial services but also in the leisure sector.

Headcounts have now been cut for three consecutive months, with the rate of job losses in December hitting the highest since the COVID-19 lockdowns of January 2021. Barring the pandemic, the survey has not seen job losses on this scale since the global financial crisis in 2009.

The recent drop in employment is notably also far greater than would typically have been seen given current output and demand growth, the latter measured by inflows of new orders. While this hints at some labour productivity improvements, such a weakening of the labour market could feed through to lower consumer confidence and spending, posing downside risks to growth in the coming months.

Inflation back on the rise

Input costs meanwhile rose at increased rates across both goods and services, often linked to suppliers pushing through price hikes, in turn commonly blamed on companies anticipating the impact of Budget-related policy changes, as well as higher wage rates. Measured across goods and services, input costs rose in December at the sharpest rate for eight months.

Average prices charged for goods likewise rose at an increased rate, often due to firms passing higher costs on to customers. The latest rise in prices was the steepest recorded since March, indicating a rekindling of inflationary pressures, notably in the services economy.

The intensification of price pressures suggests that the rate of underlying inflation in the UK has risen further above the Bank of England's 2% target after rising slightly in October. Headline inflation moved up to 2.3% in October, from 1.7% in September, according to official data, while core inflation (which excludes volatile items such as energy, food, alcohol and tobacco) ticked up from 3.2% in September to 3.3%.

Delivery delays worsen

One further aspect of the December flash PMI survey to note was a lengthening of supplier delivery times, hinting at growing supply chain delays. Delivery lead-times lengthened to the greatest extent since February, when a spike in concerns over Red Sea attacks had caused shipping delays. Longer delivery times are generally associated with increased pricing power among suppliers, posing a new inflation concern if such delays are sustained or worsen. Delays in December were again often linked to shipping issues, in part caused by the Red Sea, as well as port-related delays.

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Chris Williamson, Chief Business Economist, S&P Global Market Intelligence

Tel: +44 207 260 2329

chris.williamson@spglobal.com

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Purchasing Managers' Index™ (PMI^®) data are compiled by S&P Global for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.