The latest report on the UK economy reveals a concerning trend in the manufacturing sector, as factory activity experienced its sharpest contraction in 11 months during December 2024. According to the S&P Global UK Manufacturing Purchasing Managers' Index (PMI), the sector saw a decline to 47.0, down from 48.0 in November, and below the preliminary reading of 47.3 for December. This marks a significant slowdown, with the index now firmly below the 50-point threshold, which separates growth from contraction. The sharp contraction in UK manufacturing is attributed to multiple factors, including weak domestic demand, dwindling export sales, and rising operational costs.One of the primary drivers behind this downturn has been the increased burden of taxes on businesses. The government, under Finance Minister Rachel Reeves, has announced higher taxes that are contributing to cost pressures for manufacturers. These taxes, coupled with rising transportation and raw material costs, have left many companies struggling to maintain profitability. In response, many manufacturers have started cutting jobs, as reflected in the PMI's staffing index, which recorded its lowest level since February 2024. This is a stark indication that firms are finding it increasingly difficult to stay afloat amid the rising costs of doing business.
The report also highlighted that exports, a crucial part of the UK economy, fell sharply by the most significant margin in the past 10 months. This was driven in part by weaker economic growth outside of the UK, which dampened demand for British goods and services abroad. In addition to this, new orders also saw a significant decline, the largest drop since October 2023, reflecting the overall weak economic conditions.
Rob Dobson, a director at S&P Global Market Intelligence, pointed to a stalling domestic economy, weak export sales, and increasing concerns about future cost hikes as key factors behind the drop in manufacturing activity. The situation is further compounded by the government's planned budget changes, including increases in taxes on businesses. With the expected rise in costs in early 2025 due to these changes, manufacturers remain pessimistic about the future, and this could lead to additional cuts in employment and production.
Looking ahead, the Bank of England (BoE) is likely to maintain a cautious approach to interest rate cuts in response to the current economic challenges. While inflation pressures are still a concern, the BoE is expected to move slowly in adjusting borrowing costs to avoid worsening the economic slowdown. The central bank's cautious stance is driven by the uncertainty over whether the new government's fiscal policies, particularly the proposed tax increases, will further exacerbate inflationary pressures or contribute to the ongoing economic difficulties.
The UK economy has faced several challenges since the general election in July 2024, when the Labour party came into power. Some employers have expressed frustration with the government's negative outlook on the economy and its subsequent tax hike announcements. This shift in policy, coupled with weaker-than-expected economic growth, has raised concerns about the possibility of a recession. Data published in late December 2024 showed that the economy did not grow at all during the three months following the election, and with no growth expected in the fourth quarter either, the risk of a recession has become a key topic of discussion. The opposition Conservative Party has been vocal about these concerns, suggesting that the government’s handling of the economy could lead the country into a prolonged downturn.
In contrast to the manufacturing sector, the services sector showed some signs of improvement, according to preliminary PMI data for December 2024. However, the employment situation across both sectors—manufacturing and services—remains troubling, with layoffs continuing to mount. Employment in both sectors contracted by the most since January 2021, highlighting the strain businesses are under in a sluggish economic environment.
In conclusion, the UK manufacturing sector’s sharp decline in December 2024 reflects a combination of weak demand, rising costs, and the impact of the government's tax increases. The outlook for the first quarter of 2025 remains uncertain, with growing concerns about the potential for a recession. While the services sector showed slight improvement, the overall economic picture remains bleak, with the Bank of England expected to adopt a cautious approach to rate cuts, as inflation concerns continue to weigh heavily on policymakers' minds.
