The UK economy shrank for a second consecutive month, according to a report from S&P Global, deepening concerns about a possible recession and intensifying calls for the Bank of England to cut interest rates. The data, released Tuesday, showed business activity across both manufacturing and services declining, pushing the composite output index further into contraction territory.
What the data shows
The S&P Global UK Composite PMI, a gauge of private-sector output, fell below the 50.0 mark that separates growth from contraction for the second month running. S&P Global said the drop reflected weaker demand, falling new orders, and a continued pullback in consumer spending. Companies reported that cost pressures were easing, but that was little comfort as sales dried up. The report added to a string of gloomy economic indicators, including falling retail sales and stagnant wage growth.
Pressure on the Bank of England
The back-to-back contractions put the Bank of England in a tight spot. For months, the central bank has held its benchmark rate at a 16-year high to stamp out inflation. But with price growth now slowing and the economy visibly weakening, policymakers face growing pressure to pivot. A rate cut would lower borrowing costs for households and businesses, potentially giving the economy a shot in the arm. But officials have warned that cutting too soon could reignite inflation.
Investors are now pricing in a higher probability of a rate cut at the Bank's next meeting. Financial markets see roughly a 60% chance of a quarter-point reduction, according to swaps data. The decision is likely to hinge on the next batch of inflation data, due out in two weeks.
Lower rates would ripple across asset classes. UK equities, which have lagged global peers this year, could get a boost as cheaper borrowing costs improve corporate earnings prospects. The pound, already under pressure, might weaken further, which would help exporters but push up import prices. Currency traders are bracing for volatility around the Bank's announcement.
For investors, the message is clear: adjust risk strategies. The UK economy is no longer just cooling — it's contracting. Bond yields have already fallen as traders priced in a more dovish Bank, and some analysts expect further declines. On the other hand, any surprise that delays a cut could spark a sharp sell-off in gilts.
The broader picture is one of uncertainty. The UK is the only G7 economy where output has shrunk for two straight months. While other central banks, like the Federal Reserve, are still debating whether to hike further, the Bank of England is now squarely focused on whether to cut — and how fast.
All eyes turn to the Bank's next policy meeting in May. The decision will determine not just the path of interest rates, but the direction of the UK economy for the rest of the year.
