The economic growth rate in the United Kingdom exhibited a deceleration in September. A preliminary estimate from the widely observed Purchasing Managers’ Index (PMI) indicated a slowdown, largely attributed to the prevailing uncertainty surrounding the government’s forthcoming budget.
Businesses are adopting a cautious stance, with many delaying investment and recruitment decisions. The impending budget announcement has evidently created a climate of hesitation, especially in the manufacturing and services sectors, according to the PMI compiled by S&P Global.
PMI Composite Output Index Decline
The UK PMI ‘flash’ composite output index, which gauges business activity across services and manufacturing, fell to 52.9 in September from 53.8 in August. This marked a decline, falling short of the consensus forecast of 53.5. The index remains above the 50-point mark, indicating growth, yet it clearly suggests a slowing pace of recovery.
Wait-and-See Approach from Businesses
Businesses have increasingly adopted a ‘wait and see’ approach as they wait for Chancellor Rachel Reeves’ budget announcement slated for October 30. Many companies have put investment and hiring plans on hold pending more clarity on fiscal policies.
Chris Williamson, chief economist at S&P Global Market Intelligence, remarked that while business optimism has generally risen, the budget uncertainty has been ‘jangling nerves’ particularly within the manufacturing sector. Williamson observed, ‘Investment plans have been put on hold, and hiring has slowed as businesses await clarity on government policies, especially taxation.’
Sector-Specific Impacts
Both the services and manufacturing sectors noted slower growth than in August. Fragile client confidence and reduced inventory levels are partly to blame for this moderated pace.
Across these sectors, the decrease in new business was evident. In particular, fragile client confidence, combined with a reduction in inventory levels, contributed significantly to the overall deceleration.
Inflationary Trends Easing
Despite the observed slowdown, there are positive signs regarding inflation. Costs faced by businesses rose in September, breaking a 45-month low recorded in August. However, the rate at which companies increased prices was the slowest since February 2021.
Williamson further added that the PMI data hinted at a potential ‘soft landing’ for the UK economy. He said, ‘Inflation pressures appear to be easing without triggering a downturn.’
Bank of England’s Monetary Policy
Alex Kerr from Capital Economics commented that the dip in the PMI should not be interpreted as a precursor to an economic downturn. He projected that the Bank of England might implement one more cut to the base rate this year, following a reduction from 5.25% to 5% in August.
The final PMI report, which will be based on more complete data, may offer revisions to these preliminary estimates.
Economic Outlook and Expert Opinions
The preliminary PMI findings have painted a picture of cautious optimism. Despite the slowdown, experts like Kerr remain hopeful about the economic trajectory.
With potential adjustments to monetary policy and a scheduled budget announcement on the horizon, the economic landscape of the UK remains in a state of watchful anticipation.
Next Steps for Businesses
Companies are advised to keep a close eye on fiscal policies and future economic measures. The upcoming budget announcement will likely be a crucial determinant in shaping business strategies moving forward.
In summary, the rate of economic growth in the UK has notably decelerated in September, largely due to uncertainties surrounding the forthcoming budget. Businesses are in a holding pattern, awaiting clarity on fiscal policies before making significant investment and hiring decisions.
While the slowdown is evident, the overall outlook remains cautiously optimistic with potential easing of inflationary pressures and adjustments in monetary policy. The forthcoming budget is anticipated to play a significant role in shaping the economic landscape.
