LONDON (Reuters) -British businesses are suffering their worst month since January 2021, when they were under a COVID-19 lockdown, as the country’s political upheavals compound concerns about inflation and rising interest rates, a survey showed on Monday.

The S&P Global/CIPS flash Composite Purchasing Managers’ Index (PMI) showed a contraction in activity for a third month in a row, sinking to a 21-month low of 47.2 from September’s 49.1 and signalling Britain’s economy could be on course for a potentially deep recession.

Economists polled by Reuters had expected a reading of 48.1.

The services sector PMI contracted for the first time in 20 months, falling to 47.5 from the no-change level of 50.0 in September.

Political and economic uncertainty pushed overall activity down at a pace unseen since the global financial crisis in 2009, excluding pandemic lockdown periods, Chris Williamson, chief business economist at S&P Global Market Intelligence, said.

Other countries are also struggling with soaring energy prices. German business activity declined at a faster rate than in Britain, although France fared better than both.

The British figures suggest the Bank of England will raise interest rates by 0.75 percentage point on Nov. 3 rather than a full point as some investors had predicted, Martin Beck, chief economic adviser to the EY ITEM Club consultancy, said.

“More evidence of economic weakness, combined with signs of less heated inflationary pressures, should, all else equal, tone down the (BoE’s) appetite to raise interest rates substantially in its November meeting,” Beck said.

British business confidence also fell to levels rarely seen in the survey’s 25-year history, showing the impact on firms from the chaotic period after Prime Minister Liz Truss’s government announced unfunded tax cuts in late September that triggered a bond market rout and were eventually reversed.

Truss has said she will resign once her successor is chosen at the end of this week.

“As night follows day, investment and employment will suffer in the months ahead as companies adjust to the increasingly challenging environment,” Williamson said. “Hiring is already slowing sharply, with manufacturing now even shedding workers.”

Although price pressures weakened, the fall in the value of the pound and high energy costs meant input cost inflation was still higher than at any time prior to the pandemic, and the Bank of England was likely keep on raising interest rates, he said.

“On top of the collapse in political stability, financial market stress and slump in confidence, these higher borrowing costs will add to speculation of a worryingly deep UK recession,” Williamson said.

New orders fell at the sharpest pace since January 2021.

New British finance minister Jeremy Hunt is due to announce a medium-term budget plan on Oct. 31 likely to include spending cuts and possibly tax increases that could aggravate the expected recession.

(Reporting by William Schomberg, graphic by Vincent Flasseur; editing by John Stonestreet and Hugh Lawson)

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