The UK economy is facing a downturn, with business output contracting for the first time in over a year, according to the latest data from the S&P Global Flash Composite Purchasing Managers’ Index (PMI).
The index fell to 49.9 in November, below the neutral mark of 50.0 for the first time in 13 months, down from 51.8 in October. This decline is concerning, especially considering the new government budget that has raised concerns among employers about hiring and investment plans.
The survey results show a bleak economic landscape, with employers cutting staffing levels for the second consecutive month. The manufacturing sectors are particularly affected, experiencing the fastest reduction in headcount since February. The overall new business measure has also weakened, reaching its lowest point since November of the previous year. This contraction is compounded by a pessimistic outlook for the global economy, with the automotive sector notably struggling.
The recent budget introduced by Finance Minister Rachel Reeves has faced criticism from businesses, particularly due to the planned increase in employers’ National Insurance Contributions. Many companies are unhappy with these changes, as they believe they contradict the government’s goal of making the UK the fastest-growing economy among the Group of Seven nations. The budget adjustments, aimed at raising funds for public services, have left employers uncertain about the future, leading to a cautious approach in hiring and investment.
The UK's gross domestic product (GDP) showed only a marginal increase of 0.1% in the third quarter, and recent figures indicate a surge in government borrowing, highlighting the challenges facing the new administration. The reliance on improved economic growth to generate necessary tax revenues for public spending is becoming increasingly apparent, as businesses prepare for the impending rise in payroll costs scheduled for April.
Inflationary pressures are also a concern, with recent data showing a higher-than-expected increase in prices. This has led the Bank of England to adopt a cautious stance on potential interest rate cuts. The service sector, a critical component of the UK economy, has seen its business activity index fall to a 13-month low of 50.0, while the manufacturing index has dropped to 48.6, its lowest level in nine months. Selling prices are rising at the slowest rate since the onset of the coronavirus pandemic, but high input costs and wage-related expenses continue to burden the service sector. The Bank of England will closely monitor this situation as they assess the implications of rising costs on overall economic stability.
As the UK faces these economic challenges, the interplay between government policy, business sentiment, and inflation will be crucial in determining the trajectory of growth. The current contraction in output serves as a reminder of the complexities facing the UK economy, particularly in light of significant policy changes and external economic pressures.