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Confidence in the UK economy among manufacturers fell after Rachel Reeves’ tax-raising Budget at the sharpest rate since the start of the Covid-19 pandemic, in another setback for the chancellor.
Manufacturers’ confidence fell to 5.8 in the final quarter from 6.8, the largest quarter-on-quarter drop since the spring of 2020, according to a survey by trade group Make UK and business advisory firm BDO.
The Budget brought a previous improvement in UK manufacturing sentiment to a “shuddering halt,” according to Make UK. The survey ranks views of economic conditions in the year ahead on a scale of 1 to 10.
“Having faced a cost creep for most of the year, manufacturers are now facing a cost crisis which has brought a sharp dip in their confidence,” said Fhaheen Khan, senior economist at Make UK.
“While overall conditions had begun to gradually improve during the year, the Budget has brought this to a shuddering halt, with the substantial increase in national insurance contributions potentially the straw that might break the camel’s back for some,” he added.
Make UK now forecasts that UK manufacturing output will contract by 0.2 per cent in 2024, down from a forecast of a 0.5 per cent expansion in the last quarter, before growing by 0.7 per cent in 2025.
The forecast came despite some positive news in the survey of more than 300 business conducted in November of improved output, total orders and recruitment intentions and stable investment intentions.
The figures released on Monday added to evidence that the Labour government’s £25bn increase in employer national insurance contributions had hit business morale just as the UK economy showed signs of slowing.
Last week Reeves suffered a blow when official data showed the economy shrank by 0.1 per cent in October, the second monthly contraction in a row. The government’s stated overriding mission is faster growth.
UK GDP growth across the third quarter was just 0.1 per cent, a slowdown from 0.5 per cent in the three months to June. The S&P Global Purchasing Manager Index, a measure of the health of the private sector, fell to a year low in November.
The GDP data was largely gathered before Reeves’ October 30 Budget, which saw taxes rise overall by £40bn. The Conservatives said tax increases and Reeves’ gloomy rhetoric had undermined business confidence.
The data has complicated the picture for rate-setters at the Bank of England ahead of the monetary policy announcement on Thursday as they contemplate how quickly to cut interest rates.
Markets expect interest rates to remain unchanged at 4.75 per cent following a cut in November and August.
The bank is balancing weakened economic activity, which would support a faster pace in the reduction of borrowing costs, against persistent price pressures and high uncertainty, which support a more cautious approach.
Economists polled by Reuters expect UK services inflation, a key indicator of domestic price pressure, to accelerate to 5.1 per cent in November when data is published on Wednesday.
This would be up from 5 per cent in October and well above a rate consistent with the BoE’s 2 per cent inflation target.
The “recent weakness in activity is unlikely to be enough to prompt a further cut again at its December meeting,” said Gabriella Dickens, economist at Axa Investment Managers.
But she added: “The risks to the ‘gradual’ pace of cuts laid out by policymakers recently, are tilting evermore to the downside.”
Other central banks have moved more quickly to reduce borrowing costs. In December, the Bank of Canada lowered interest rates by a large half a percentage point, the European Central Bank reduced borrowing costs for the fourth time this year and the Federal Reserve is expected to cut its Fed Funds target rate by a quarter of a percentage point on Wednesday.