Unlock Editor’s Digest for free
Roula Khalaf, FT Editor, picks her favorite stories in this weekly newsletter.
UK business activity shrank for the first time in over a year, according to a closely watched survey, as the private sector was warned that confidence in the Labor government had been badly hit by last month’s Budget.
The composite PMI index, a measure of the health of Britain’s manufacturing and services sectors, fell below the 50 mark, indicating that most groups are now reporting worsening conditions.
After the release of the data, which came on the heels of disappointing retail figures, the pound fell 0.5 percent against the dollar to $1,252, the weakest level since May.
“Companies gave a clear ‘thumbs down’ to the policies announced in the Budget, especially the planned increase in employers’ national insurance contributions,” said Chris Williamson, of S&P Global, in reference to Chancellor Rachel Reeves’ tax increase plan. .
The flash index, produced by S&P Global, fell to 49.9 in November from 51.8 the previous month, with businesses reporting a drop in output for the first time in a year.
The figure, the lowest since October 2023, contrasted with analysts’ expectations that the index would be unchanged from the previous month.
Williamson said business optimism had fallen sharply since Britain’s July 4 general election. Many companies say the £25bn NIC rise, which Labor says is necessary to boost the public finances and invest in the NHS, will lead to job cuts and push up inflation.
Samuel Johar, chairman of Buchanan Harvey’s advisory board, said that at a recent reception for CEOs, bankers and private equity executives, “the atmosphere was really negative”. He added: “They seem to have lost faith in the government in just a few months.”
A top City headhunter said that, when the company wanted a government that is “long-term, business aware, investor friendly . . . what they have is not long term, does not understand business, and is not investor friendly”.
The headhunter added that the government must “get this resolved, or the short-term problem will become an insurmountable one”.
Last month’s budget, which also increased the national living wage, strained Labour’s relationship with groups in sectors including retail and hospitality, despite promises from Reeves to work with business and lead Britain’s “pro-growth” Treasury.
Elias Hilmer, an economist at Capital Economics consultancy, said the drop in the PMI indicated that GDP could now shrink after almost no growth in the third quarter.
He added that the tax increase “seems to have restrained some private sector activity”, and the prospect of new tariffs imposed by US president-elect Donald Trump “may weigh on activity as well”.
However, he said increased government spending announced in the Budget – a factor unlikely to be captured in the PMI survey – could contribute to growth.
The Office for Budget Responsibility and the Bank of England have forecast that the provisions in the Budget – particularly greater public spending – will boost GDP in the short term while raising inflation.
Separate data published by the Office for National Statistics on Friday showed the biggest monthly drop in retail sales since June, a month-on-month slide of 0.7 percent in October.
This beat economists’ forecasts of a 0.3 percent decline and came as sales growth for September was revised down to 0.1 percent.
“Retailers across the board are reporting that consumers are holding back on spending ahead of the Budget,” said ONS senior statistician Hannah Finselbach, adding that October was a “bad month for clothing stores”.
The October 30 budget comes after months of warnings from the new government about painful tax increases.
Samantha Phillips, a partner in management consultancy McKinsey & Company, said that for many retailers it was a “disappointing start to the golden quarter”, with the focus shifting to “how to build momentum” in the run-up to the festive period.
But data released on Friday by research firm GfK showed that consumer confidence has recovered since the Budget, rising by 3 points in November to minus 18.
The composite PMI index for the Eurozone also fell to a 10-month low on Friday from 48.1 as manufacturing slipped into a deeper recession and the services sector struggled amid concerns about future US tariffs and a weakening German economy.
This story has been corrected to make it clear that the PMI numbers reflect the rate of change in business activity
