UK Manufacturing Expansion May Be Short-Lived On Budget Fears

UK manufacturing output expanded for the first time in a year in October, following the restart of production at Jaguar Land Rover (JLR) after a cyberattack, a survey published today showed.

The seasonally adjusted S&P Global UK Manufacturing Purchasing Managers' Index (PMI) rose to 49.7 in October, a 12‑month high, up from 46.2 in September, S&P Global Market Intelligence said. Three of the PMI components — new orders, employment, and stocks of purchases — registered contractions.

"The October PMI survey shows UK manufacturing production rising for the first time in a year, which is a positive in itself," Rob Dobson, Director at S&P Global Market Intelligence, said. The restart of JLR helped companies rebuild depleted backlogs and increase stock levels, he added.

JLR in the UK suffered a major cyberattack on August 31 that disrupted its internal IT systems and halted production for several weeks.

"There are real concerns that the bounce could prove short-lived," Dobson said. "Manufacturers seem to be stuck in a holding pattern until the domestic policy and geopolitical backdrops exhibit greater clarity."

British Business Sentiment Deteriorates

Despite the PMI increase, business sentiment deteriorated in October. Manufacturers' optimism about the business situation fell to -31%, while optimism about export prospects declined to -43%, according to the CBI.

New export orders dropped for the forty‑fifth consecutive month, amid weaker demand from the US, EU, Asia, and the Middle East, S&P said. Weak global conditions, tariff uncertainty, and UK competitiveness issues continued to limit overseas demand.

"Manufacturers are finding the going tough," Ben Jones, Lead Economist, Confederation of British Industry (CBI), said on October 23. "Order books are weakening, cost pressures remain stubbornly high, and uncertainty is rising ahead of the Budget. This is making businesses increasingly reluctant to commit to new hiring and investment."

The balance of output volumes for the quarter to October fell to -16% from -13% in the three months to September, CBI said. The slight decline has reflected subdued demand and rising uncertainty ahead of the November 26 budget.

Forthcoming UK Budget Raises Concerns

The government has difficult fiscal decisions to make when Chancellor of the Exchequer Rachel Reeves announces the government's budget. Reeves has to fill a fiscal hole of as much as £35 billion ($46 billion) without hurting economic growth and undermining investor sentiment.

In the 2024/25 fiscal year, public sector net borrowing hit £146.3 billion, the third highest since records began in 1993, according to the CBI on October 23. This was far above the £87.2 billion forecast in March 2024 and the £127.5 billion projection in October 2024.

"The upward movement in borrowing reflected not only the ongoing impact of higher inflation and interest payments on government debt, but also increased departmental spending and sluggish tax receipts," CBI said.

"The Chancellor is going to need to either raise revenue, cut public spending, or a combination of both, ensuring decisions made also help to boost productivity and growth outcomes."

Reeves has examined more than 100 tax and spending options, reportedly focusing on the top third of earners, Yahoo Finance reported. Uncertainty remains over how much taxes need to rise.

Reeves, Starmer Waver on Taxing ‘Working People'

Reeves and Prime Minister Keir Starmer promised voters before winning last year's election that they would not raise taxes on "working people." But on October 29, Starmer declined to commit to the pledge and said the economy was in a worse state than he thought.

Reeves has reportedly considered a 20% exit charge on wealthy Britons leaving the country to raise some £2 billion for the Treasury, Bloomberg reported. She might raise the main income tax rate by one percentage point to raise an extra £8 billion a year, The Guardian reported.

"The Chancellor must also commit to no further business tax rises at the Budget and to boosting resources for exporters that will help firms maximize trading opportunities while raising productivity and growth," Jones said.

If Starmer and Reeves fail to get the budget right, right-leaning Reform UK could extend its popularity. Reform UK would lead with around 34% of the vote to Labour's 22%, according to a September poll by Ipsos.

British GDP Growth Remains Lackluster

The UK economy grew just 0.1% in August, according to the latest figures from the Office for National Statistics (ONS). Production rose by 0.4% in August, whereas services showed no growth and construction fell by 0.3%, the ONS noted.

The latest growth data will give the Chancellor pause, Scott Gardner, investment strategist at J.P. Morgan-owned digital wealth manager, Nutmeg, said on October 16.

"This slowdown will concern policymakers and could make all the difference when it comes to tax and spending decisions," he told CNBC in emailed comments. "Unlocking growth is critical to easing the U.K.'s financial pressures and putting the economy back on solid ground."

Another concern for Starmer and Reeves will be rising unemployment. The UK's jobless rate rose to 4.8% in the three months to August, above 4.7% in July.

"Employment contracted for the twelfth consecutive month in October, as the impact of subdued demand and earlier labor cost increases continued to drive job losses," S&P Global Market Intelligence said. "There were reports of natural attrition, hiring freezes, cost-control initiatives and difficulties finding appropriately skilled staff."

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