The UK’s economic growth showed signs of slowing down as concerns over the government’s budget weighed heavily on business activity.
- In September, the UK PMI composite output index declined to 52.9, indicating slower growth compared to August’s 53.8, despite remaining above the growth threshold.
- Business sentiment was affected as many companies adopted a cautious stance, delaying investments and recruitment until after the budget announcement by Chancellor Rachel Reeves.
- Manufacturing and services sectors both experienced reduced growth, influenced by client confidence and inventory levels.
- Forecasts indicate that inflation may be easing, leading to potential base rate cuts by the Bank of England.
The UK’s economic growth rate demonstrated a decline in September, influenced by uncertainties surrounding the anticipated government budget. The PMI composite output index, a crucial measure of business activity, showed a decrease to 52.9 from August’s 53.8. Although the index remains above the 50-point mark, signalling continued growth, the figure reveals a deceleration in economic recovery.
In preparation for the upcoming budget by Chancellor Rachel Reeves, many businesses have adopted a ‘wait and see’ approach. Investment and recruitment activities have been paused by several firms as they await clarity on upcoming fiscal policies, particularly those relating to taxation. Such uncertainties have contributed to a cautious business climate, particularly impacting the manufacturing sector.
Chris Williamson, chief economist at S&P Global, noted an increase in business optimism despite the uncertainties, describing it as ‘jangling nerves’. Both services and manufacturing sectors saw slower growth compared to August, with new business activities feeling the effects of fragile client confidence and reductions in inventory levels.
Williamson optimistically noted potential signs of a ‘soft landing’ for the UK economy. Data suggested that inflationary pressures might be subsiding without instigating an economic downturn. Despite an increase in business costs in September, the pace at which companies raised prices was the slowest observed since February 2021. Alex Kerr from Capital Economics pointed out that while the PMI dip is not indicative of an imminent downturn, further base rate cuts by the Bank of England are expected. This follows the reduction of the base rate from 5.25% to 5% in August, with additional cuts anticipated into 2024.
As the UK navigates economic uncertainties, upcoming fiscal policies and potential interest rate adjustments will be crucial in shaping future growth.
