Economy stalls on Budget fears in blow to Chancellor

A pick-up in business activity over the summer has been dismissed as ‘a flash in the pan’ after the economy ground to a halt last month.

In a report that will make bleak reading for Rachel Reeves, S&P Global said its index of private sector output fell from 53.5 in August to just 50.1 in September.

That was the lowest level for five months and only marginally above the 50 mark that separates growth from decline, suggesting the economy is flatlining ahead of the Chancellor’s Budget in November.

Households and businesses are fearful over another round of punishing tax rises as the cost of last October’s Budget – which included a £25billion National Insurance raid on employers – continues to take its toll. The report noted that the private sector shed jobs for a 12th month in a row in September – ‘and at a solid pace’ – as firms struggled to deal with rising costs.

Tim Moore, economics director at S&P Global, said: ‘This summer’s acceleration in output growth is now looking like a flash in the pan as elevated political and economic uncertainty has reasserted itself as a constraint on service sector performance.

‘Many survey respondents suggested that corporate clients had deferred spending decisions until after the Autumn Budget^[1], while households were also hesitant about major purchases.’

Hands up: S&P Global said its index of private sector output fell from 53.5 in August to just 50.1 in September, which will be a blow to Rachel Reeves

Business leaders are urging Reeves not to hit them with further tax hikes. Tesco boss Ken Murphy this week declared: ‘Enough is enough.’

But Reeves is facing a black hole in her Budget plans of some £30billion on some estimates – making more tax rises seem inevitable given Labour’s failure to cut spending.

The S&P Global report showed activity in the services sector ‘increased marginally’ in September ‘but manufacturing production fell to the greatest extent for six months’.

Matt Swannell, chief economic advisor to the EY Item Club, said: ‘Businesses are still feeling the effects of April’s rise in employers’ National Insurance contributions, which continues to put pressure on costs.’

Thomas Pugh, chief economist at consulting firm RSM UK, said: ‘The economy is doing little more than muddling through.

‘The risk is that intense speculation about potential tax rises in the Budget weighs heavily on consumer confidence and business sentiment.’