Budget uncertainty hits UK businesses this month
Uncertainty ahead of next month’s budget is weighing on the UK economy, the latest survey of purchasing managers across British companies shows.
Data firm S&P Global reports that UK private sector activity growth has slowed this month, across both services firms and manufacturers.
Some companies reported that clients are taking a “wait-and-see approach” to decision-making ahead of the Autumn Budget, which is hitting investment.
Fiscal policy uncertainty ahead of the budget, due on 30 October, was “by far the most cited concern among UK private sector firms”, the PMI survey shows.
Private sector employment growth slowed for the second month running to its weakest since June.
But encouragingly, firms slowed their price rises this month – with the average prices charged by private sector firms rising at the slowest rate since February 2021.
Overall, the Flash UK PMI Composite Output Index dipped to 52.9, down from August’s 53.8. That’s a two-month low, but still in growth territory, and much cheerier than in Germany or the wider eurozone this month (see earlier posts).
Chris Williamson, chief business economist at S&P Global Market Intelligence says:
“The September PMI data bring encouraging news, with robust economic growth being accompanied by a cooling of inflationary pressures. The data therefore hint at a ‘soft landing’ for the UK economy, whereby the fight against inflation is showing increasing signs of being won without higher interest rates having caused a downturn.
Williamson adds, though, that concerns about the budget are “jangling nerves somewhat”, explaining:
Investment plans in particular are reported to have been put on ice pending clarity on the new government’s policies, especially towards taxation. Hiring likewise has been stifled by business uncertainty about the near-term economic outlook ahead of the ‘budget’.
Chancellor Rachel Reeves has pledged this morning that there will not “be a return to austerity”.
Speaking to BBC Radio 4’s Today programme this morning, Reeves said:
“There won’t be a return to austerity, there will be real terms increases to government spending in this Parliament.
“What I’m saying is there will not be real terms cuts to government spending, but the detailed department by department spending will be negotiated.”
Key events
UK factory export orders slide
Newsflash: UK factories have been hit by a slump in export orders this month.
The CBI reports that export order books are now their weakest since December 2020 – during the first year of the Covid-19 pandemic, and just before the UK signed the Brexit trade agreement.
Its latest industrial trands report has found that total and export order books at manufacturers deteriorated in September.
A net balance of 44% of manufacturers reported that their export order books were below “normal” this month. That’s a considerable deterioration compared to August, where the reading was -22%.
The latest CBI Industrial Trends Survey found that manufacturing output fell sharply in the three months to September, at the fastest pace for four years. Output is expected to fall in the three months to December . #ITS pic.twitter.com/uA9Un36bTI
— CBI Economics (@CBI_Economics) September 23, 2024
Worryingly, output volumes fell sharply in the three months to September – and manufacturers expect output to decline again in the three months to December. This is the first time since November 2023 that expectations have been negative.
Ben Jones, CBI lead economist, said:
“This was a uniformly disappointing set of results for the manufacturing sector, with output falling over the past quarter, order books deteriorating and manufacturers expecting activity to soften further in the remaining months of the year.”
“The survey highlights that the recovery of the UK economy seen over the first half of 2024 remains fragile, with uneven progress seen across different sectors, and businesses increasingly cautious ahead of the Budget at the end of next month.”
“In the meantime, firms will be looking to the Chancellor to reaffirm the government’s mission of long-term economic growth, providing them with the confidence and opportunities to invest and grow.”
Total order books were reported as below “normal” and deteriorated in September relative to last month. Export order books were also seen as below “normal” and also deteriorated relative to last month. Both total and export order books remained below their long-run averages. #ITS pic.twitter.com/IE4W9Jtsuu
— CBI Economics (@CBI_Economics) September 23, 2024
The UK PMI report is the latest sign that uncertainty around October Budget is a concern for businesses, says Daniel Mahoney, UK economist at Handelsbanken:
Mahoney also points to last Friday’s data showing consumer confidence in the UK has fallen sharply.
He says today:
While the [PMI] release is showing a broadly positive picture for the UK’s economic prospects, concerns about the upcoming Budget feature prominently in the survey. We saw last Friday that consumer confidence has taken a knock due to worries about upcoming tax measures and businesses appear to be concerned on this front, too.
In both the manufacturing and service sectors there were some reports of clients adopting a “wait and see” approach to decision making ahead of the Autumn Budget. Moreover, the most cited concern among UK private sector firms was fiscal policy uncertainty ahead of the October Budget. We continue to hope that the hit to consumer and, to a lesser extent, business confidence is short-lived given the fundamentals of the UK economy do not warrant this kind of pessimism.
Anti-corruption campaigners welcome investigations into £600m of Covid contracts
The news that Rachel Reeves is ordering investigations into more than £600m worth of Covid contracts awarded under the Conservatives has been welcomed by anti-corruption campaigners.
The Guardian reported this morning that the chancellor will announce today that she will refer more than half of contracts for material such as masks to the incoming Covid corruption commissioner.
Daniel Bruce, chief executive of Transparency International UK says this is an “important first step” towards accountability over governent spending during the pandemic.
Bruce hopes that some of the money spent on pandemic equipment can be recovered, saying:
“We have repeatedly warned of the scale of corruption risk in the former government’s approach to procurement during the pandemic and have identified over £15 billion of high-risk contracts in need of investigation.
Today’s announcement is an important first step towards full accountability for the serious procurement failings we saw during the pandemic and we urge the Chancellor to launch similar investigations into the 135 contracts we’ve identified.
Such investigations offer an important chance for the new government to recoup some of the millions of pounds of public money wasted on these contracts and implement lessons learned to ensure this never happens again.
This month’s slowdown in company prices rises, according to the PMI report, may make it easier for the Bank of England to lower interest rates soon.
S&P’s Chris Williamson explains:
In the meantime, services inflation, stubbornly elevated rates of which have been the bugbear of the Bank of England, cooled in September to the lowest since February 2021 to help bring the Bank of England’s 2% inflation target closer into view.
The survey data therefore support the view that there is scope for interest rates to fall further in the closing months of 2024.”
Capital Economics predict the Bank will cut rates once more this year in November, before the pace of cuts quickens next year with rates eventually settling at 3.00%.
This morning’s “ugly” eurozone PMI numbers contrast again with a more resilient UK economy, says Kyle Chapman, FX markets analyst at broker Ballinger Group.
The UK maintained its growth advantage versus the eurozone in September, according to the PMIs. While the eurozone economy slipped into contraction for the first time since February at 48.9, the British surveys signalled cooler but steady growth at 52.9.
The eurozone numbers are not pretty, and they are providing some validation to those at the ECB calling for a quicker pace of rate cuts to ease the deceleration in activity. The economic rebound we saw in the first half of the year has completely fizzled out, and the return to contraction attests to the fact that ECB policy is probably more restrictive than necessary.
Pricing for an October rate cut is ticking higher, and without a stabilisation in the growth outlook, there will be convergence to the more dovish rate path for the Fed – especially given growing signs of layoffs in the manufacturing sector. That’s not a good picture for the euro.
Meanwhile, the UK economy remains relatively resilient, and the gap has widened even further versus the eurozone. Everything about the report says soft landing for the UK – growth is cooling but remains robust, and inflationary pressures are evidently easing. There are plenty of softer price indicators in the report for the Bank of England to take comfort from, with employment growth slowing and growth in end prices falling to a more than three-year low.
Pound hits two-year high against euro
The pound has hit a two-year high against the euro, after this morning’s PMI surveys showed the UK economy outperforming the eurozone this month.
Sterling has gained half a eurocent to €1.1967 this morning, its highest level since early August 2022.
Although UK company growth is slowing this month, the economy doesn’t seem to be sliding into a downturn, reports Alex Kerr, UK economist at Capital Economics.
Kerr says that September’s PMI report is consistent with GDP growth slowing from 0.6% q/q in the second quarter of this year to a more normal rate of around 0.3% q/q in the third quarter.
Kerr told clients:
The fall in September’s composite flash PMI is not a sign that the economy is on the cusp of another downturn, but instead is further evidence that real GDP growth has slowed towards a more normal rate in Q3 after the burst of growth in the first half of the year.
Budget uncertainty hits UK businesses this month
Uncertainty ahead of next month’s budget is weighing on the UK economy, the latest survey of purchasing managers across British companies shows.
Data firm S&P Global reports that UK private sector activity growth has slowed this month, across both services firms and manufacturers.
Some companies reported that clients are taking a “wait-and-see approach” to decision-making ahead of the Autumn Budget, which is hitting investment.
Fiscal policy uncertainty ahead of the budget, due on 30 October, was “by far the most cited concern among UK private sector firms”, the PMI survey shows.
Private sector employment growth slowed for the second month running to its weakest since June.
But encouragingly, firms slowed their price rises this month – with the average prices charged by private sector firms rising at the slowest rate since February 2021.
Overall, the Flash UK PMI Composite Output Index dipped to 52.9, down from August’s 53.8. That’s a two-month low, but still in growth territory, and much cheerier than in Germany or the wider eurozone this month (see earlier posts).
Chris Williamson, chief business economist at S&P Global Market Intelligence says:
“The September PMI data bring encouraging news, with robust economic growth being accompanied by a cooling of inflationary pressures. The data therefore hint at a ‘soft landing’ for the UK economy, whereby the fight against inflation is showing increasing signs of being won without higher interest rates having caused a downturn.
Williamson adds, though, that concerns about the budget are “jangling nerves somewhat”, explaining:
Investment plans in particular are reported to have been put on ice pending clarity on the new government’s policies, especially towards taxation. Hiring likewise has been stifled by business uncertainty about the near-term economic outlook ahead of the ‘budget’.
Chancellor Rachel Reeves has pledged this morning that there will not “be a return to austerity”.
Speaking to BBC Radio 4’s Today programme this morning, Reeves said:
“There won’t be a return to austerity, there will be real terms increases to government spending in this Parliament.
“What I’m saying is there will not be real terms cuts to government spending, but the detailed department by department spending will be negotiated.”
Eurozone economy shrinking for first time in seven months
The downturn in Germany has pulled the wider eurozone economy into a contraction this month.
Business activity across the euroarea has decreased so far in September, according to the HCOB Flash Eurozone PMI index. It has dropped to 48.9 this month, an eight month low, and below the 50-point mark showing stagnation.
As well as Germany’s slump, the eurozone was also pulled down by a contraction in France’s private sector, as an Olympics-related boost to business activity in August faded.
Business confidence continued to wane, as firms reported a drop in new orders.
Eurozone PMI
Manufacturing 44.8 (est 45.7, last 45.8)
New Orders 42.3 (last 43.3)
Employment 45.8 (47.2)
Inventories 46.2 (49)
Exports 43.3 (44.8)
Px Paid 49.2 (53.4)Services 50.5 (est 52.3, last 52.9)
Employment 50.6 (last 50.9)
Exports 47.7 (48.6)
Px Paid 55.7 (57.8) pic.twitter.com/KgrhxrKXEe— Mario Cavaggioni (@CavaggioniMario) September 23, 2024
Why REA Group wants to buy Rightmove
The recovery in the UK housing market, and the prospect of more cuts to UK interest rates, makes Rightmove an attractive target for Australia’s REA Group, says Susannah Streeter, head of money and markets at Hargreaves Lansdown:
Streeter explains:
Rightmove shares had been affected by the property market downturn amid a ratcheting up in interest rates. But now, with more cuts eyed on the horizon and a recovery in prices underway, there are now many more eyes on screen.
REA Group is clearly highly tempted by the sturdy fundamentals of the model, which offers an envious operating margin position of around 70%. DIY alternatives may be growing, but they are only a small slice of the market, and many estate agents can’t afford not to advertise on Rightmove. That’s demonstrated by their willingness to pay bigger sums to attract potential buyers.
Although total membership has reduced by 1% in the last full year, average revenue per advertiser was up 9% to £1,431.
German recession ‘baked in’ as manufacturing slumps
Newsflash: the German economy is sinking deeper into contraction, dragged down by its manufacturing sector.
Thw latest HCOB ‘flash’ PMI survey compiled by S&P Global, just released, shows that business activity across Germany is falling at the quickest rate for seven months in September.
German businesses reported increased caution among customers, deterring them from making investments; concerns towards the health of the economy were reported to be a factor.
Total inflows of new business fell at the quickest rate for nearly a year in September, and firms cut jobs for the fourth month running.
This pulled Germany’s flash composite PMI output index down for the fourth month in a row, to 47.2, down from August’s 48.4. That’s the lowest reading since February – anything below 50 shows a contraction.
Manufacturing shrank at the fastest pace in a year, while the modest growth in the services sector was the weakest in six months.
Dr. Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, fears that a technical recession (two quarters of negative growth in a row) in Germany is now “baked in”.
De la Rubia says:
“The downturn in the manufacturing sector has deepened again, evaporating any hope for an early recovery. Output plunged at the fastest rate in a year, with new orders collapsing. In a sign of resignation, companies have shed staff at a rate not seen since the COVID-19 pandemic in 2020. This comes as several major automotive suppliers have announced significant job reductions. These troubling figures are likely to intensify the ongoing debate in Germany about the risk of deindustrialization and what the government should do about it.
Optimism is something of the past. Manufacturers are downright depressed about their future activity, with expectations for the coming year plummeting. In a striking shift, moderate optimism in August has quickly turned into the steepest pessimism in a year by September. This rapid downturn in sentiment is most likely linked to the wave of negative headlines surrounding Volkswagen, which has cast a shadow over the broader industry.
Hamburg Commercial Bank predicts Germany’s economy will shrink by 0.2% in the July-September quarter. That would put the country into recession, as GDP fell by 0.1% in April-June.