In October, output in the UK’s extensive service sector saw its slowest growth rate in nearly a year as businesses faced declining confidence and reduced spending ahead of the impending budget announcement.

The final purchasing managers’ index (PMI) from S&P Global and the Chartered Institute of Procurement and Supply reflected a decrease from 52.4 to 52.0 for the £1.7 trillion sector, as companies awaited policy updates from the Labour government.

While a PMI reading above 50 signals growth, the reported increase in output marked the slowest pace since November 2023.

Participants in the S&P survey indicated that although economic conditions in the UK had seen some improvement, there were concerns about “heightened business uncertainty” related to the upcoming budget, leading many to postpone spending. The findings also suggested that geopolitical factors were discouraging expenditures among certain sectors, including finance, retail, education, and healthcare.

Consumer and business confidence took a hit as uncertainty loomed over potential tax increases before Chancellor Rachel Reeves’ inaugural budget. The government signaled a need for tax hikes to address a significant financial shortfall, resulting in the GfK consumer confidence index dropping from -13 in August to -20 in September, and a decline in the Institute of Directors’ economic confidence index from -12 to -38 in the same period.

In her recent budget announcement, Reeves planned to raise employers’ national insurance contributions by approximately £25 billion, which is expected to exert pressure on wage growth. The Institute for Fiscal Studies noted that this increase would significantly affect larger companies employing lower-salaried workers.

Tim Moore, economics director at S&P Global Market Intelligence, remarked, “October’s data indicates a further deceleration in output growth across the service sector as rising business uncertainty and concerns about the UK economy negatively impacted demand conditions.

“The anticipation for clarity on government policies preceding the autumn budget has reportedly contributed to diminished business confidence and spending. Broader geopolitical issues and upcoming US elections have also fostered a cautious approach to business investment decisions in October, alongside persistent cost-of-living pressures that continue to restrict household expenditure.”

Elliott Jordan-Doak, a senior UK economist at Pantheon Macroeconomics, stated that the slowdown could equip the Bank of England’s monetary policy committee with the rationale to reduce the bank rate this week and indicate further gradual reductions in 2025.

He further noted, “The PMI has encountered challenges from budgetary uncertainties this month rather than a substantial decline in economic conditions. However, forward-looking indicators within the survey suggest that growth could rebound later in the year, and the chancellor’s expansionary budget may also stimulate GDP.”

Jordan-Doak commented on firms’ optimism regarding sales pipelines and overall market conditions but acknowledged that political uncertainties had dampened confidence in October. While input price inflation moderated, output price increases slightly accelerated.

Matt Swannell, chief economic adviser to the EY Item Club, emphasized that the recent data should not raise significant alarm. He explained, “Data can exhibit volatility, with the compilers of the survey noting that uncertainties leading up to the budget are postponing spending decisions.

“The survey indicated that rising wage pressures contributed to increased input cost inflation, which businesses are reflecting in their output prices. However, these increases follow several years of low figures noted in September.”