London Daily

Focus on the big picture.
Saturday, Jan 03, 2026

Cost of living: UK economy edges closer to stagnation with factory slump

Cost of living: UK economy edges closer to stagnation with factory slump

A deepening downturn in manufacturing output is only just offset by modest expansion of the larger services sector, but Britain still performs better than the eurozone which fell further into recession territory as higher energy costs squeezed consumer spending.

UK private sector growth has moved closer to stagnation as it slowed to a new 18-month low, dragged down by a slump in factory output, latest data indicates.

The closely watched S&P Global/CIPS Purchasing Managers' Index (PMI) composite flash estimate dropped to 50.9 in August from 52.1 in July, its lowest since February 2021 and close to the 50 level that separates growth from contraction.

Economists had forecast the index would fall less sharply to 51.1.

Annabel Fiddes, economics associate director at S&P Global Market Intelligence, said: "The UK private sector moved closer to stagnation in August, as mild growth of activity across the service sector only just offset a deepening downturn at manufacturers.

"Waning customer demand amid the weaker economic outlook, and shortages of both staff and inputs, were reported to have hit goods producers hard, with firms registering the quickest drops in output and new work since May 2020."

The slowdown in overall growth was largely driven by a sharper slump in manufacturing output from UK factories.

The manufacturing sector reported monthly output of 42.4, representing the steepest fall for more than two years.

Firms reported "reduced customer demand, the delayed delivery of inputs and labour shortages" for the month.

Separate figures from the Confederation of British Industry, also released on Tuesday, showed the first fall in factory output since February 2021 and the weakest order book since April that year.

Meanwhile, the larger services sector saw only modest expansion, with a 52.5 measure for August.

John Glen, chief economist at the Chartered Institute of Procurement & Supply (CIPS), said: "Service companies had a better month, but only marginally as new order levels were sustained and optimism remained that customers would continue to buy throughout the year.

"However, this may reverse quite quickly.

"There are many concerns keeping private sector business owners awake at night, such as disruptions to supply chains from war, the highest inflation in the UK for almost 50 years, the impact of higher interest rates and now port disruptions in the UK, to name a few."

Nevertheless, companies signalled a further easing in the rate of cost inflation.

Manufacturers reported the rate of their cost inflation slowed to the lowest since November 2020 as commodities such as metals came down in value, although a continued tight labour market pushed up services companies' costs slightly.

Britain's composite PMI, covering manufacturing and services, exceeded that for the eurozone which fell further into recession territory as higher energy costs - caused largely by Russia's invasion of Ukraine - squeezed consumer spending.

The Bank of England has warned that Britain too is likely to slip into a recession at the end of 2022 which will last until 2024 as energy bills are expected to push consumer price inflation above 13% in October, having already hit a 40-year high of 10.1% in July.

Economists at Citi forecast on Monday that inflation would exceed 18% in January when the energy price cap is due to rise again.

HSBC said the latest figures sent mixed messages to the central bank for its decision next month on whether to raise interest rates by another half a percentage point, after it did so for the first time since 1995 earlier this month.

HSBC economist Elizabeth Martins said: "The fall in manufacturing is ammunition for the doves, as are the trends in pricing.

"But strong demand, employment and staff costs in the sector that accounts for 80% of GDP - services - also looks hawkish."

Newsletter

Related Articles

0:00
0:00
Close
UK Manufacturing Growth Reaches 15-Month Peak as Output and Orders Improve in December
Beijing Threatened to Scrap UK–China Trade Talks After British Minister’s Taiwan Visit
Newly Released Files Reveal Tony Blair Pressured Officials Over Iraq Death Case Involving UK Soldiers
Top Stocks and Themes to Watch in 2026 as Markets Enter New Year with Fresh Momentum
No UK Curfew Ordered as Deepfake TikTok Falsely Attributes Decree to Prime Minister Starmer
Europe’s Largest Defence Groups Set to Return Nearly Five Billion Dollars to Shareholders in Twenty Twenty-Five
Abu Dhabi ‘Capital of Capital’: How Abu Dhabi Rose as a Sovereign Wealth Power
Diamonds Are Powering a New Quantum Revolution
Trump Threatens Strikes Against Iran if Nuclear Programme Is Restarted
Apple Escalates Legal Fight by Appealing £1.5 Billion UK Ruling Over App Store Fees
UK Debt Levels Sit Mid-Range Among Advanced Economies Despite Rising Pressures
UK Plans Royal Diplomacy with King Charles and Prince William to Reinvigorate Trade Talks with US
King Charles and Prince William Poised for Separate 2026 US Visits to Reinforce UK-US Trade and Diplomatic Ties
Apple Moves to Appeal UK Ruling Ordering £1.5 Billion in Customer Overcharge Damages
King Charles’s 2025 Christmas Message Tops UK Television Ratings on Christmas Day
The Battle Over the Internet Explodes: The United States Bars European Officials and Ignites a Diplomatic Crisis
Princesses Beatrice and Eugenie Join Royal Family at Sandringham Christmas Service
Fine Wine Investors Find Little Cheer in Third Year of Falls
UK Mortgage Rates Edge Lower as Bank of England Base Rate Cut Filters Through Lending Market
U.S. Supermarket Gives Customers Free Groceries for Christmas After Computer Glitch
Air India ‘Finds’ a Plane That Vanished 13 Years Ago
Caviar and Foie Gras? China Is Becoming a Luxury Food Powerhouse
Hong Kong Climbs to Second Globally in 2025 Tourism Rankings Behind Bangkok
From Sunniest Year on Record to Terror Plots and Sports Triumphs: The UK’s Defining Stories of 2025
Greta Thunberg Released on Bail After Arrest at London Pro-Palestinian Demonstration
Banksy Unveils New Winter Mural in London Amid Festive Season Excitement
UK Households Face Rising Financial Strain as Tax Increases Bite and Growth Loses Momentum
UK Government Approves Universal Studios Theme Park in Bedford Poised to Rival Disneyland Paris
UK Gambling Shares Slide as Traders Respond to Steep Tax Rises and Sector Uncertainty
Starmer and Trump Coordinate on Ukraine Peace Efforts in Latest Diplomatic Call
The Pilot Barricaded Himself in the Cockpit and Refused to Take Off: "We Are Not Leaving Until I Receive My Salary"
UK Fashion Label LK Bennett Pursues Accelerated Sale Amid Financial Struggles
U.S. Government Warns UK Over Free Speech in Pro-Life Campaigner Prosecution
Newly Released Files Shed Light on Jeffrey Epstein’s Extensive Links to the United Kingdom
Prince William and Prince George Volunteer Together at UK Homelessness Charity
UK Police Arrest Protesters Chanting ‘Globalise the Intifada’ as Authorities Recalibrate Free Speech Enforcement
Scambodia: The World Owes Thailand’s Military a Profound Debt of Gratitude
Women in Partial Nudity — and Bill Clinton in a Dress and Heels: The Images Revealed in the “Epstein Files”
US Envoy Witkoff to Convene Security Advisers from Ukraine, UK, France and Germany in Miami as Peace Efforts Intensify
UK Retailers Report Sharp Pre-Christmas Sales Decline and Weak Outlook, CBI Survey Shows
UK Government Rejects Use of Frozen Russian Assets to Fund Aid for Ukraine
UK Financial Conduct Authority Opens Formal Investigation into WH Smith After Accounting Errors
UK Issues Final Ultimatum to Roman Abramovich Over £2.5bn Chelsea Sale Funds for Ukraine
Rare Pink Fog Sweeps Across Parts of the UK as Met Office Warns of Poor Visibility
UK Police Pledge ‘More Assertive’ Enforcement to Tackle Antisemitism at Protests
UK Police Warn They Will Arrest Protesters Chanting ‘Globalise the Intifada’
Trump Files $10 Billion Defamation Lawsuit Against BBC as Broadcaster Pledges Legal Defence
UK Says U.S. Tech Deal Talks Still Active Despite Washington’s Suspension of Prosperity Pact
UK Mortgage Rules to Give Greater Flexibility to Borrowers With Irregular Incomes
UK Treasury Moves to Position Britain as Leading Global Hub for Crypto Firms
×