UK economic growth slows amid uncertainty over upcoming budget

UK economic growth slows amid uncertainty over upcoming budget

The pace of economic growth in the UK slowed in September, as concerns about the government’s upcoming budget weighed on business activity, according to a preliminary estimate from the widely tracked PMI (Purchasing Managers’ Index).

The UK PMI “flash” composite output index, which measures business activity in both the services and manufacturing sectors, slipped to 52.9 in September from 53.8 in August, falling short of the consensus forecast of 53.5. Although the figure remains above the 50-point threshold, indicating continued growth, it reflects a deceleration in the pace of recovery.

The PMI, compiled by S&P Global from a survey of 1,300 firms, highlighted that businesses are increasingly adopting a “wait and see” approach in the lead-up to Chancellor Rachel Reeves’ budget announcement on October 30. Some companies have paused investment and recruitment decisions until fiscal policies are clarified.

Chris Williamson, chief economist at S&P Global Market Intelligence, noted that while business optimism had risen, uncertainty about the budget was “jangling nerves,” particularly in the manufacturing sector. “Investment plans have been put on hold, and hiring has slowed as businesses await clarity on government policies, especially taxation,” he said.

Both services and manufacturing sectors experienced a slower pace of growth than in August, with new business tempered by fragile client confidence and a reduction in inventory levels. However, Williamson was optimistic, stating that the data suggested a “soft landing” for the UK economy and that inflation pressures appeared to be easing without triggering a downturn.

While costs faced by businesses rose in September, breaking a 45-month low recorded in August, the rate at which companies raised prices was the slowest since February 2021, hinting that inflationary pressures may be under control.

Despite the slowdown, Alex Kerr from Capital Economics said the dip in the PMI was not indicative of a looming downturn. He expects the Bank of England to make one more cut to the base rate this year, following the reduction from 5.25% to 5% in August, with further cuts expected in 2024.

The final PMI report, based on more complete data, may revise these initial estimates.