UK Private Sector Faces Recession Amid Tax Hikes
The UK private sector has shifted from modest growth to recession following the recent budget announcement, as indicated by the Purchasing Managers' Index (PMI) data. The composite PMI dropped from 51.8 in October to 49.9 in November, marking its lowest level in over a year. This decline was below economists' expectations and suggests that the economy contracted at a quarterly rate of 0.1%. Chris Williamson, chief economist at S&P Market Intelligence, noted that the loss of confidence could lead to further job losses unless sentiment improves.
The downturn has been exacerbated by a controversial budget from Chancellor of the Exchequer Rachel Reeves, which included a £40 billion ($50 billion) tax increase. This increase has significantly impacted companies, raising their operating costs and contributing to a pessimistic outlook for economic activity. The services sector, a key driver of the UK economy, saw a notable slowdown, with its PMI falling from 52 to 50 points, the lowest in 13 months. Manufacturing output also contracted at its fastest pace in nine months, indicating widespread caution among businesses.
Economic Outlook and Government Challenges
The recent budget has faced harsh criticism, particularly regarding the planned increase in employers' National Insurance contributions, which businesses have openly disapproved of. The report highlights that growth in new business is at its weakest since December 2023, reflecting the negative sentiment following the budget announcement. Despite a slight boost in demand attributed to the clarity of the political scene post-US elections, the overall economic outlook remains grim.
As the Labour government led by Keir Starmer grapples with these challenges, the pressure to revive economic growth intensifies. Expectations have risen that the Bank of England may cut interest rates by three-quarters of a percentage point by the end of 2025, as British government bonds rose in response to the economic conditions. However, the future remains uncertain as the government seeks to reassure the private sector amidst rising costs and weak demand.
