British businesses experienced a deceleration in growth this month as some companies expressed concerns over potential tax increases, according to a survey that also indicated easing price pressures, potentially prompting the Bank of England to contemplate another interest rate cut. However, economists generally interpreted the data as signaling a return to a more sustainable growth trajectory following a post-recession surge earlier in the year—in stark contrast to the significantly weaker performance observed in the eurozone this month.
The preliminary estimate of the UK S&P Global Composite Purchasing Managers’ Index (PMI) dropped to 52.9 from 53.8, falling below all forecasts in a poll of economists but remaining comfortably above the 50 level that demarcates growth from contraction. Data firm S&P Global noted that these figures align with Britain’s economy expanding at a quarterly rate of 0.3 percent, approximately half the pace seen earlier this year, but still outperforming much of the past two years. Sterling strengthened against the US dollar in response to the data, partially reversing losses incurred following the release of eurozone data earlier on Monday, which indicated a contraction in the economy.
“The decline in September’s composite flash PMI is not indicative of the economy teetering on the brink of another downturn, but rather further evidence that real GDP growth has decelerated towards a more typical rate in Q3 after the surge in growth during the first half,” explained Alex Kerr, UK economist at Capital Economics. Input costs faced by companies increased at a faster rate in September, yet companies raised the prices they charge by the smallest margin since February 2021, and they also exhibited a more optimistic outlook, buoyed by the relative stability in the economy.
The Bank of England recently stated it would await clearer signals on inflation before considering further interest rate cuts, following an initial reduction in August. A Reuters poll of economists published earlier this month suggested the BoE will reduce borrowing costs just once more this year, in November. S&P Global highlighted that the primary concern expressed by firms was related to uncertainty surrounding the Oct. 30 budget, when new finance minister Rachel Reeves will unveil her first tax and spending plans.
“Investment plans, in particular, have been put on hold pending clarity on the new government’s policies, particularly regarding taxation. Hiring has also been restrained by business uncertainty about the near-term economic outlook ahead of the budget,” noted S&P economist Chris Williamson. Britain’s longest-running consumer sentiment survey revealed an unexpected decline on Friday, attributed to concerns over higher taxes and cuts to pensioners’ benefits. Reeves has cautioned that taxes may need to rise more than her Labour Party initially indicated during this year’s election campaign, due to what she described as a 22 billion-pound ($29 billion) shortfall in public finances left by the Conservatives.
The PMI for the services sector, which is the backbone of Britain’s economy, decreased to 52.8 from 53.7 in August, once again falling below the poll consensus of 53.5. Growth weakened more noticeably among factories, with the manufacturing PMI declining by a full point to 51.5.
