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, measuring business activity across both services and manufacturing sectors, declined to 52.9 in September from 53.8 in August. This figure fell short of the consensus forecast of 53.5. Although it remains above the 50-point threshold that signals continued growth, it signifies a deceleration in the pace of recovery.
Compiled by S&P Global from a survey of 1,300 firms, the PMI highlighted that businesses are increasingly adopting a ‘wait and see’ approach as they anticipate Chancellor Rachel Reeves’ budget announcement on 30 October. Some companies have temporarily paused their investment and recruitment decisions pending clarification on fiscal policies. Chris Williamson, Chief Economist at S&P Global Market Intelligence, noted that while business optimism had risen, budgetary uncertainty was ‘jangling nerves,’ especially in the manufacturing sector. He stated, ‘Investment plans have been put on hold, and hiring has slowed as businesses await clarity on government policies, especially taxation.’
Both the services and manufacturing sectors experienced a slower pace of growth compared to August. New business activity was tempered by fragile client confidence and reduced inventory levels. Nevertheless, Williamson expressed optimism, suggesting that the data pointed to a ‘soft landing’ for the UK economy. He added that inflation pressures seemed to be easing without triggering a downturn.
In September, businesses faced increased costs, breaking a previous 45-month low recorded in August. However, the rate at which companies raised their prices was the slowest since February 2021, indicating that inflationary pressures might be under control. Despite the slowdown, Alex Kerr from Capital Economics argued that the dip in the PMI did not signal an impending downturn. He anticipates that the Bank of England will make one more cut to the base rate this year, following the reduction from 5.25% to 5% in August, with additional cuts expected in 2024.
The final PMI report, which will be based on more comprehensive data, may revise these initial estimates.
While the UK’s economic growth has slowed, uncertainty surrounding the upcoming budget has led businesses to take a cautious approach. The PMI data, though indicative of slower growth, suggests that inflationary pressures are easing, providing some reassurance about the economic outlook. Businesses and economists alike are looking ahead to the budget announcement for further clarity on fiscal policies.