UK will have highest inflation in G7 for two years, says Moody’s – latest updates

Orders from the US, China, Europe and South America are all in freefall, according to the purchasing managers’ index (PMI), an influential survey of businesses from S&P Global.

As a result, output and activity in manufacturing is falling more sharply than at any point since the first Covid lockdown. Aside from the pandemic, this is the worst performance since the financial crisis.

The UK’s manufacturing PMI score fell to 43 in August, from 45.3 in July. Any score of less than 50 shows activity is falling, so this points to a deepening crunch in the industry.

Among Europe’s major economies, only Germany’s manufacturers are suffering a deeper crunch than Britain’s.

Fhaheen Khan, economist at industry group Make UK, said higher interest rates and sustained inflation have hammered demand.

He said: “Manufacturers are now acting by cutting jobs and investment as the backlog of work starts to dry leading to an inevitable downturn in economic activity soon.

“Policy makers and rate setters will need to be wary of the cost of higher unemployment given prices remain elevated for many consumers and the loss of incomes will hurt many if we take this too far.”

There is a glimmer of light as manufacturers reported their output prices edged down for the third month in a row, raising hopes that consumers will see some relief from the cost of living crisis.

The Bank of England is expected to raise interest rates again this month, from 5.25pc to 5.5pc. 

But Martin Beck, chief economic advisor to the EY Item Club, said signs of slowing growth and easing inflation will put pressure on officials to hold rates instead.

He added: “For sure, the Monetary Policy Committee’s focus in its forthcoming September rate decision is likely to remain on measures of inflation persistence in the official pay and services inflation data.

“But growing evidence of a weakening economy and disinflationary pressure mean the possibility that the MPC will choose to keep rates unchanged is looking more plausible.”    

At the same time Europe’s factories are braced for a deepening slump as orders from customers plunged, indicating the economic crunch, led by Germany, is far from over.

The purchasing managers’ index is up from 42.7 in July, but is still well below the crucial 50-level.

Germany is deepest in contractionary territory, with its powerful industrial base recording a score of 39.1. Italy’s 45.4, France’s 46.0 and Spain’s 46.5 are also well below 50 and so indicate the manufacturing sectors of all four major eurozone economies are shrinking.

New orders are falling at one of the fastest paces on record, with domestic and export demand dropping sharply, while factories are rapidly working through backlogs of previous orders.