The pace of economic growth in the UK slowed in September, as concerns about the government’s upcoming budget weighed on business activity.
A preliminary estimate from the Purchasing Managers’ Index (PMI) revealed a reduction in the growth rate, sparking widespread economic caution among businesses.
The UK PMI “flash” composite output index, which gauges business activity in both services and manufacturing sectors, fell to 52.9 in September from 53.8 in August. This figure was lower than the consensus forecast of 53.5, indicating a deceleration in the pace of economic recovery. Although the index remains above the critical 50-point threshold, which signifies continued growth, it reflects a slowing pace of progress.
According to the PMI survey, compiled by S&P Global from a pool of 1,300 firms, businesses are increasingly adopting a “wait and see” approach as they anticipate Chancellor Rachel Reeves’ budget announcement on 30 October. Many companies have paused their investment and recruitment decisions until there is more clarity on fiscal policies.
Chris Williamson, Chief Economist at S&P Global Market Intelligence, noted that business optimism had improved, yet the looming budget announcement is “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,” said Williamson. Both the services and manufacturing sectors showed a slower pace of growth than in August, with new business tempered by fragile client confidence and lower inventory levels.
Despite the overall slowdown, there are signs of optimism. Williamson pointed out that the data suggest a “soft landing” for the UK economy. Additionally, inflationary pressures appear to be easing without causing an economic downturn.
While the costs faced by businesses rose in September, breaking a 45-month low recorded in August, the rate at which companies increased prices was the slowest since February 2021. This trend hints that inflationary pressures may be under control.
Despite the slowing growth, some experts believe the situation is not entirely bleak. Alex Kerr from Capital Economics remarked that the dip in the PMI is not an indicator of an impending downturn. He expects the Bank of England to make another cut to the base rate this year, after reducing it from 5.25% to 5% in August, with further cuts anticipated in 2024.
The final PMI report, which will be based on more comprehensive data, might revise these initial estimates. The PMI’s preliminary nature means it does not capture the complete economic picture and can be subject to adjustments.
In summary, the slowdown in the UK’s economic growth can be attributed to the uncertainty surrounding the upcoming budget.
While business optimism is improving, the ‘wait and see’ approach adopted by many firms indicates that the economic landscape remains uncertain.
