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Confidence in the UK economy fell among manufacturers after Rachel Reeves raised taxes by the biggest rate since the start of the Covid-19 pandemic, in another setback for the Chancellor.
Manufacturer confidence fell to 5.8 in the fourth quarter from 6.8, the biggest quarter-on-quarter decline since spring 2020, according to a survey by trade group Make UK and business consultancy BDO.
The Budget brought the previous improvement in UK manufacturing sentiment to an abrupt halt, according to Make UK. The survey ranks opinions of economic conditions in the coming year on a scale of 1 to 10.
Faheen Khan, chief economist at Make UK, said: “After facing cost increases for most of the year, manufacturers are now facing a cost crisis that has seen their confidence fall sharply.”
He added: “Although general conditions began to gradually improve during the year, the budget brought this to an abrupt halt, with the significant increase in National Insurance contributions potentially being the straw that might break the camel's back for some.”
Make UK now expects UK manufacturing output to 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.
These expectations came despite some positive news in the survey of more than 300 companies conducted in November regarding improved production, total orders, employment intentions and stable investment intentions.
The figures released on Monday add to evidence suggesting that the Labor government's £25bn increase in employers' National Insurance contributions has dented business sentiment at a time when the UK economy has shown signs of slowing.
Last week, Reeves was dealt a blow when official data showed the economy contracted by 0.1 per cent in October, the second monthly contraction in a row. The government's stated primary mission is to achieve faster growth.
UK GDP growth during the third quarter was just 0.1 per cent, a slowdown from 0.5 per cent in the three months to June. The Standard & Poor's Global Purchasing Managers' Index, a measure of the health of the private sector, fell to its lowest level in November.
The GDP data was largely collected ahead of Reeves' Budget on October 30, which saw taxes overall rise by £40bn. The Conservatives said the tax rises and Reeves' sombre rhetoric had undermined business confidence.
The data complicated the picture for Bank of England rate-setters ahead of Thursday's monetary policy announcement as they consider how quickly to cut interest rates.
Markets expect interest rates to remain unchanged at 4.75 percent after being cut in November and August.
The bank is working to balance weak economic activity, which would support a faster pace of reducing borrowing costs, against continued price pressures and high uncertainty, which supports a more cautious approach.
Economists polled by Reuters expect UK services inflation, a leading indicator of domestic price pressure, to accelerate to 5.1 percent in November when data is published on Wednesday.
This would be higher than 5 per cent in October, and well above a rate consistent with the Bank of England's 2 per cent inflation target.
“The recent weakness in activity is unlikely to be enough to prompt further cuts again at the December meeting,” said Gabriella Dickens, economist at Axa Investment Managers.
But she added: “The risks to the recent ‘gradual’ pace of cuts set by policymakers are increasingly leaning towards the downside.”
Other central banks moved more quickly to reduce borrowing costs. In December, the Bank of Canada cut interest rates by a large half a percentage point, the European Central Bank cut borrowing costs for the fourth time this year, and the Fed is expected to cut its target federal funds rate by a quarter of a percentage. point on Wednesday.
