Pace of growth falters amid worries about budget

The pace of economic growth in the UK faltered slightly in September because of “jangling nerves” over the budget next month, according to the first estimate of a closely watched barometer of British businesses.
The UK PMI “flash” composite output index slipped back to 52.9 in September from the 53.8 recorded in August and was lower than the consensus forecast of 53.5.
The measure of output of both services businesses and manufacturers was nevertheless comfortably above the 50 level, which constitutes no change in activity.
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S&P Global, which compiles the index through a survey of 1,300 British firms, said that while the data indicated a continuation of a sustained upturn in business activity, the overall speed of recovery had moderated for the first time since June.
It also found evidence that some businesses were pausing investment and recruitment decisions until after the budget. S&P said that some respondents were adopting a “wait and see approach to decision-making” until after Rachel Reeves, the chancellor, sets out her fiscal plans on October 30.
While business optimism had increased, concerns about the impact of the budget were “jangling nerves somewhat, notably in the manufacturing sector”, said Chris Williamson, chief business economist at S&P Global Market Intelligence.
He said: “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.”
Both the services and manufacturing sectors posted a slower upturn than in August, with robust new business wins tempered by reports of “fragile client confidence” and cutbacks to inventory levels.
The picture for future inflation was mixed, with the average cost burden faced by businesses rising at a robust pace, picking up from a 45-month low recorded for August. However, the rise in average prices charged by firms was the lowest since February 2021.
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Williamson said that the overall picture was promising, with the data hinting at a “soft landing” for the UK economy. “The fight against inflation is showing increasing signs of being won without higher interest rates having caused a downturn,” he said.
The moderation should not be seen as too concerning, he added.
Alex Kerr, UK economist at consultancy Capital Economics, said the PMI decline was not a sign that the economy was on the cusp of another downturn. “It 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.”
He predicted one more cut in base rate this year, in November, before further reductions next year. The Bank of England reduced the benchmark interest rate from 5.25 per cent to 5 per cent in August.
In the US, where the Federal Reserve last week surprised investors with a 50 basis point cut to the main lending rate, economic performance remained robust this month but business optimism for the future is starting to wane.
The world’s biggest economy recorded a flash PMI reading of 54.4, buoyed by strong performance in the services sector, at 55.4, but manufacturing remains in contraction and hit a 15-month low at 47.0.
A slowdown in order book growth and a deterioration in US business expectations for the year ahead to a near two-year low reflected heightened uncertainty ahead of the presidential election.
Williamson said there were “warning lights flashing”.
He said: “Business sentiment, demand, hiring and investment are being subdued by uncertainty surrounding the election, casting a shadow over the outlook for the year ahead at many firms.”
The “flash” report is compiled when 80 per cent to 90 per cent of survey responses have been processed and it may be revised in the final report.