(Bloomberg) -- The first signs of the real economy hit from the UK budget appeared in a raft of data on Friday that included a “clear thumbs down” from companies about Chancellor of the Exchequer Rachel Reeves’ fiscal plans.
S&P Global’s UK PMI suggested the private sector was stagnant in November, after firms shouldered the bulk of the £40 billion ($50 billion) of tax rises in Reeves’ Oct. 30 budget. It plunged to 49.9 — the lowest in over a year and narrowly below the 50 threshold separating growth and contraction — from last month’s 51.8 that had signaled solid but unspectacular growth.
The survey pointed to a return to the stagnant growth that has dogged the economy in recent years, a setback for Prime Minister Keir Starmer after he cast his Labour Party as the party of business and promised to turbocharge UK growth on his way to a landslide victory in the July general election.
“Today’s PMI data were the first real test of the Chancellor’s budget – alongside businesses reaction to unfolding geopolitical events,” said Sanjay Raja, chief UK economist at Deutsche Bank.
The link to the budget in Friday’s data releases was bolstered by indicators from the consumer side of the economy. Reeves spared households some of the pain on taxes but hit businesses with a jump in the minimum wage and a £25 billion payroll tax hike. While GfK on Friday said its consumer confidence indicator in November remained below levels before budget speculation rattled confidence, it improved from minus 21 to minus 18.
Later, the Office for National Statistics said retail sales figures covering October when budget speculation was rife showed a 0.7% month-on-month fall in volumes, a larger-than-expected drop.
After enjoying the strongest growth in the Group of Seven in the first half of the year, GDP growth slowed markedly to just 0.1% in the third quarter when the new Labour government took power. The latest data suggest the final quarter of the year may also be disappointing for Starmer, who has promised to boost annual growth to an ambitious 2.5%.
The figures started to show early signs of divergence in the prospects for UK consumers and businesses, as events at home and abroad throw up more uncertainty over the economy’s outlook.
Businesses face the threat of a global trade war erupting in the wake of Donald Trump’s US election victory, plus a surge in their costs after Reeves’s budget. The Bank of England is still unsure whether firms will react to the higher costs by taking a hit to their profit margins, or passing the pain back to consumers through higher prices, lower wage growth and job losses.
“Companies are giving a clear ‘thumbs down’ to the policies announced in the Budget, especially the planned increase in employers’ National Insurance contribution,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.
Meanwhile, households are being buoyed by rising real incomes, gradually falling interest rates and Reeves shielding them from the worst of her budget squeeze, as she raised money to pump into public services. Consumers will not be unscathed, after officials announced Friday that the UK’s energy price cap that sets gas and electricity bills will edge 1.2% higher from January.
The softer growth signals may start to feed through to the thinking of BOE policymakers with traders boosting bets on a bigger easing next year. Following the disappointing retail sales and PMI figures, investors were fully pricing in three quarter-point interest rate cuts by November next year.
Signs of a weaker economy “make a February rate cut a slam dunk,” said Pantheon Macroeconomics senior UK economist Elliott Jordan-Doak. The “risks lie to more and/or faster cuts to Bank Rate than our forecast after today’s PMI,” he said.
Still, policy-makers will want to see the weakening turn up in official activity data before acting, given the PMI often exaggerates the growth impact from political turmoil.
Governor Andrew Bailey has said gradual rate cuts are needed given the uncertainty posed by the budget’s impact and the return of Trump in the White House. A weaker-than-expected economy in the coming quarters may force policymakers to rethink the pace of the loosening.
--With assistance from Andrew Atkinson.
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