The UK economy experienced a deceleration in growth in September as businesses adopted a cautious approach ahead of a significant budget announcement. This summary highlights the key aspects of the recent economic developments.
- The PMI composite output index fell from 53.8 in August to 52.9 in September, below the forecasted 53.5.
- Businesses are delaying investment and recruitment decisions until the government’s fiscal policies are clarified.
- Both the services and manufacturing sectors reported slower growth rates and fragile client confidence.
- Inflationary pressures appear to be easing, but the cost increases faced by businesses have slightly risen.
The UK PMI “flash” composite output index, which measures business activity in both the services and manufacturing sectors, declined from 53.8 in August to 52.9 in September, falling short of the consensus forecast of 53.5. Although the index remains above the 50-point threshold that signifies growth, it indicates a deceleration in the economic recovery pace. This data, compiled by S&P Global from a survey of 1,300 firms, reflects increased business caution ahead of Chancellor Rachel Reeves’ budget announcement on October 30.
Businesses are increasingly taking a ‘wait and see’ stance, with several companies pausing investment and recruitment decisions until there’s clarity on government fiscal policies. Chris Williamson, chief economist at S&P Global Market Intelligence, mentioned that while business optimism had risen, budget-related uncertainty was ‘jangling nerves,’ particularly 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 growth rate compared to August. New business activities were tempered by fragile client confidence and a reduction in inventory levels. This cautious approach has led to a moderated pace of economic expansion.
However, some optimism persists, as Williamson noted that the data suggests a ‘soft landing’ for the UK economy, implying a controlled deceleration without triggering a severe downturn. Additionally, inflationary pressures appear to be easing. Despite a rise in the costs faced by businesses in September, surpassing a 45-month low recorded in August, the rate at which companies increased prices was the slowest since February 2021. This trend hints at manageable inflation levels, although cost pressures remain.
Alex Kerr from Capital Economics added that the decline in the PMI does not indicate an impending downturn. He expects the Bank of England to implement one more base rate cut this year, following the reduction from 5.25% to 5% in August, with further cuts anticipated in 2024. Final PMI data, based on more comprehensive information, may lead to revisions of these initial estimates.
Despite the slowed growth, economic indicators suggest a controlled deceleration with manageable inflation pressures as businesses await clarity on upcoming fiscal policies.
