UK Economic Growth Slows in September Amid Budget Uncertainty

The pace of economic growth in the UK slowed in September, as apprehensions surrounding the government’s upcoming budget dampened business activity, according to a preliminary estimate from the widely monitored Purchasing Managers’ Index (PMI).

The UK PMI “flash” composite output index, which gauges business activity across both the services and manufacturing sectors, fell to 52.9 in September, down from 53.8 in August. This figure missed analysts’ consensus forecast of 53.5. While still above the critical 50-point threshold indicating growth, the decline suggests a deceleration in the recovery pace.

Compiled by S&P Global from a survey of 1,300 firms, the PMI indicated that many businesses are adopting a “wait and see” approach ahead of Chancellor Rachel Reeves’ budget announcement scheduled for October 30. Numerous companies have paused investment and recruitment decisions until there is more clarity on fiscal policies.

Chris Williamson, chief economist at S&P Global Market Intelligence, highlighted that despite a rise in business optimism, uncertainty regarding the budget is causing concern, particularly within the manufacturing sector. “Investment plans have been put on hold, and hiring has slowed as businesses await clarity on government policies, especially taxation,” he stated.

Both the services and manufacturing sectors reported slower growth than in August, with new business hindered by fragile client confidence and reduced inventory levels. However, Williamson expressed optimism, suggesting that the data points to a “soft landing” for the UK economy, with easing inflation pressures not leading to a downturn.

Although costs faced by businesses increased in September, reversing a 45-month low from August, the rate at which companies raised prices was the slowest since February 2021, indicating that inflationary pressures may be stabilizing.

Despite the slowdown, Alex Kerr from Capital Economics asserted that the dip in the PMI does not signal an imminent downturn. He anticipates one more cut to the Bank of England’s base rate this year, following a reduction from 5.25% to 5% in August, with further cuts expected in 2024.

The final PMI report, based on more comprehensive data, could lead to revisions of these initial estimates, providing a clearer picture of the UK’s economic trajectory in the coming months.