UK Business Activity Slows

By Andy Bruce and David Milliken

(Reuters) – British business activity growth slowed significantly in December, with employers cutting staffing at the fastest rate in nearly four years due to a drop in corporate morale after the government’s budget was released. According to a Monday survey:

• The final headline UK S&P Composite Purchasing Managers’ Index (PMI) dropped to 50.4 from 50.5 in November, marking its lowest level since October 2023. A preliminary reading for December was also 50.5.
• The survey is slightly above the 50 threshold between growth and contraction and adds to a series of disappointing economic indicators following finance minister Rachel Reeves’ announcement of significant tax increases, the largest since 1993, in October.

The British Chambers of Commerce (BCC) revealed on Sunday that business confidence fell to its lowest point since the aftermath of former Prime Minister Liz Truss’ “mini-budget” in 2022, with concerns about tax rises reaching their highest since at least 2017.

Britain’s economy stagnated in the three months ending in September, and the Bank of England (BoE) predicts it will remain flat in the fourth quarter. While the BoE expects higher public spending to provide a temporary growth boost this year, there is uncertainty surrounding the impact of Reeves’ tax increases on employment, prices, and investment.

Investors anticipate two quarter-point rate cuts by the BoE in 2025 amid ongoing inflation pressures. Tim Moore, economics director at S&P Global Market Intelligence, noted that “…a post-Budget slump in business optimism persisted in December, with output growth expectations unchanged from November’s 23-month low.” Elliott Jordan-Doak, senior economist at Pantheon Macroeconomics, stated that PMI data from the fourth quarter aligns with an estimated economic growth of 0.1%-0.3%, slightly above the BoE’s projection but still weak.

Job Cuts in Businesses

The PMI data indicated that businesses have reduced headcount at the fastest rate since January 2021, during a COVID-19 lockdown. Many companies reported cutting jobs primarily due to rising costs resulting from Reeves’ increase in employer social insurance contributions starting in April.

The PMI’s future output gauge fell to its lowest since December 2022, and business costs have been rising at the fastest pace since April. Moore pointed out that nearly one-in-four survey respondents reported an overall decline in payroll numbers, which, excluding the pandemic, represents the sharpest job shedding in over 15 years.

The BCC survey of roughly 5,000 businesses revealed that 55% of firms plan to raise prices, an increase from 39% the previous quarter, and 24% intend to cut investment, up from 18% previously. A separate survey by the Federation of Small Businesses showed that 67% of respondents plan to hire fewer staff, while 32% aim to reduce headcount.