The British government's new plan to raise taxes on businesses has contributed to the first contraction in private sector activity in more than a year, a survey has found, after signs that the economy was losing momentum ahead of last month's budget.
The S&P Global Flash Composite Purchasing Managers' Index (PMI) published on Friday fell to 49.9 in November from 51.8 in October.
"The first look at the health of the economy after the budget paints a bleak picture," said Chris Williamson, Chief Business Economist at S&P Global Market Intelligence.
This is the first time the index has fallen below 50.0, which shows no change, in 13 months.
Williamson said the survey suggested the economy was contracting at a quarterly rate of 0.1%, but falling confidence was fuelling a more dire outlook, including more job losses.
The pound sterling fell half a cent against the US dollar on the day, with investors almost entirely expecting the Bank of England to cut interest rates to 4% by the end of 2025 from 4.75% now.
“For policymakers, the key question now is whether the potential inflationary impact of higher taxes offsets the impact of weaker demand from the private sector,” said Sanjay Raja, chief UK economist at Deutsche Bank.
Some manufacturers are concerned about a possible resurgence of trade tensions if Donald Trump becomes the next US president. But others are hoping that clarity after the election will pave the way for investment decisions.
The PMI also showed employers cutting staff for a second straight month, while the overall new business measure was at its weakest level in a year.
The weak outlook for the global economy is weighing on companies, particularly the struggling auto sector. But the British government’s first steps are also a cause for concern.
Chancellor of the Exchequer Rachel Reeves has increased the annual burden of social security payments on employers by about 25 billion pounds ($31 billion) a year. Most businesses said its budget on October 30 fell short of the government’s pledge to make Britain the fastest-growing economy in the G7.
Friday’s PMI survey found firms were not replacing workers who quit as they braced for wage increases in April.
Selling prices rose at their slowest pace since the coronavirus pandemic, but high input prices and wage-related costs continued to weigh on the services sector.
The situation is likely to raise concerns among interest rate policymakers at the Bank of England, who are closely monitoring prices in the services sector.
