Newsflash: UK private sector growth has slipped to its lowest in almost a year, as nervous companies brace for next week’s budget.

Data firm S&P Global reports that growth is slowing this month, to the weakest pace since last November.

Companies reported that clients were delaying decision-making, due to heightened economic uncertainty in October – ahead of Rachel Reeves’s first budget, and with conflict in Ukraine and the Middle East continuing.

There was also concerns among clients about near-term domestic economic growth prospects, the report says.

Business confidence weakened, to the lowest since November 2023, leading firms to cut headcounts for the first time this year.

This pulled the Flash UK PMI Composite Output Index, which measures activity across the private sector, down to 51.7 this month, down from September’s 52.6, an 11-month low.

Growth across both manufacturing and services weakened; here’s the details:

• Flash UK Services PMI Business Activity Index at 51.8 (Sep: 52.4), an 11-month low.

• Flash UK Manufacturing Output Index at 50.9 (Sep: 53.6), a 6-month low.

• Flash UK Manufacturing PMI at 50.3 (Sep: 51.5), a 6-month low

Chris Williamson, chief business economist at S&P Global Market Intelligence, says:

“Business activity growth has slumped to its lowest for nearly a year in October as gloomy government rhetoric and uncertainty ahead of the Budget has dampened business confidence and spending. Companies await clarity on government policy, with conflicts in the Middle East and Ukraine, as well as the US elections, adding to the nervousness about the economic outlook.

The early PMI data are indicative of the economy growing at a meagre 0.1% quarterly rate in October, reflecting a broad-based slowing of business activity, spending and demand across both manufacturing and services.

Worryingly, the deterioration in business confidence in the outlook has also prompted companies to reduce headcounts for the first time this year.

The downturn in Germany (see previous post) is holding the eurozone economy back from growth this month.

The HCOB preliminary composite euro zone Purchasing Managers’ Index has inched up to 49.7 for October, up from 49.6 in September, but still below the 50-point mark that separates expansion from contraction.

The report found that Germany and France were again the main sources of weakness, while output increased in the rest of the eurozone.

Dr. Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, says the eurozone is “stuck in a bit of a rut”, adding:

The ongoing slump in manufacturing is being mostly balanced out by small gains in the service sector. At the country level, it can be noted that the deterioration of the situation in France was met by a slight moderation in the decline in Germany.

For now, it is not clear whether we will see a further deterioration or an improvement in the near future.

The economic downturn in Germany is continuing this month, as businesses cut jobs as output declines.

The latest survey of purchasing managers from across Germany’s private sector shows that conditions continue to deteriorate across Europe’s largest economy, led by its ailing manufacturing sector.

Businesses have reported further decreases in output and employment amid a backdrop of weak underlying demand, with workforce numbers falling at the fastest rate for nearly four-and-a-half years.

Data provider S&P Global reports that its HCOB flash Germany Composite PMI Output Index has come in at 48.4 this month.

That’s still below the 50-point mark that shows stagnation, but is slightly better than September’s seven-month low of 47.5 (implying Germany’s economy is still shrinking, but at a slower rate than last month).

Manufacturing production fell again, although the service sector grew a little faster.

Dr. Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, suggests Germany’s economy could grow this quarter, saying:

“The start to the fourth quarter is better than expected. With services growing at a faster pace and manufacturing shrinking not as quickly as in the previous month, growth in the fourth quarter is a distinctive possibility.

Even so, GDP may stay flat for the whole year as forecasted by the International Monetary Fund in its latest projection, after a 0.3% decline in 2023. This underscores the structural weaknesses of the German economy, such as high energy costs, the increased competition from China and the labour market shortages which are all hitting the manufacturing sector hard.

Following in Lloyds Banking Group’s footsteps, Barclays’ CEO has thrown his weight behind Labour’s prospective plans for a tax raising, fiscal-rule shifting budget next week.

Speaking reporters following the release of the bank’s Q3 results (see earlier post), Barclays chief CS Venkatakrishan dodged questions about the potential impact of tax measures including a hike to employers’ national insurance contributions.

However, he made it clear he was backing Labour’s vision, even if it involves tax rises:

I see from the Labor government – and I’ve seen it from before they came into power – a very clear vision about what they want for the UK.

That vision is one of economic growth, and growth that is broad reaching, and growth that covers the important sectors of the economy, such as not just on the high tech side, climate, tech, pharma, but also in addressing the needs of individuals, most important of which is housing right, which takes a bigger part of the consumer budget in the UK than in many other countries in the world.

So all of that requires some amount of investment, and that investment has got to be funded both by some taxation, some borrowing and private sector health. That mix is what the government ultimately has to decide through the budget and other processes.

Barclays, like Lloyds, has been working closely with Labour both in the lead-up and wake of the general election in July.

Both banks were headline sponsors of the government’s international investment summit, which took place on 14 October.

Venkatakrishnan is also part of the government’s National Wealth Fund Taskforce, while its chair Nigel Higgins sat on Labour’s Financial Services Review Advisory Panel earlier this year.

UK government borrowing cost are rising in early trading, as the City reacts to the news that Rachel Reeves will announce changes to Britain’s debt rules at the IMF this week.

It’s not a major move – this is NOT a repeat of the mini-budget crash two autumns ago.

The yield (or interest rate) on UK 10-year government debt has risen by over 3 basis points, from 4.21% last night to 4.24% this morning.

Yields rise when bond prices fall, and reflect the cost of government borrowing.

Significantly, though, the yield on the equivalent US debt (10-year Treasury bills) has dropped by over 3 basis points, to 4.2% from 4.24% yesterday. Germany bond yields are also falling, so the UK is bucking that trend.

Simon French, chief economist of investment bank Panmure Liberum, points out that UK bonds have been trading “differently” since the election.

He says Rachel Reeves wants to avoid bond market losses on Budget day:

This is why the Chancellor is front running a Budget announcement at the IMF this week – she doesn’t want surprises on Budget Day to cause further Gilt market dislocation.

Traders may be concluding that the UK will borrow more if Reeves changes the UK’s debt target, to public sector net financial liabilities (PSNFL); an increase in supply of debt would generally lead to lower prices, and thus higher yields.

However, Andrew Bailey’s comments last night may also be moving the bond market.

Although Bailey said inflation was lower than expected, he also flagged some concerns about the stickinesss of services inflation, saying:

“We’ve got to see services prices inflation come further down. It’s grinding down, but we do have these outstanding questions as to whether we’ve seen some structural change which is going to … in a sense cause that to become more sticky.”

The odds of a November rate cut have dipped a little, to 86% according to the latest City pricing, down from 89% before bond trading began this morning.

Back in the UK, maverick retail chief Mike Ashley has launched a bid to become chief executive of BooHoo.

Fraser Group, which owns around 27% of Boohoo, has presented its founder Ashley as the solution to the “leadership crisis” at the online clothing retailer.

There is a vacancy to fill – last week, Boohoo announced that CEO John Lyttle was stepping down as it launched a strategic review which could result in the company’s break-up.

Frasers also want to put restructuring expert Mike Lennon on the Boohoo board as a director, at an extraordinary general meeting.

It told the City this morning:

The Board appointments proposed by Frasers are now the only way to set a new course for boohoo’s future. Frasers urges boohoo shareholders to vote in favour of its proposals.

Boohoo says it is “in the process of reviewing the content and validity” of Frasers’ request, and urges shareholders to take no action in the meantime….

A senior IMF official has told the BBC that the UK needs more investment, to catch up with G7 rivals.

Gita Gopinath, the First Deputy Managing Director of the IMF, also warned that the world economy could contract by the size of the combined French and German economies if a ‘broad based trade war’ broke out, the BBC’s Faisal Islam reports:

Gopinath said:

If you have some very serious decoupling and broad scale use of tariffs, you could end up with a loss to world GDP of close to 7%”.

“These are very large numbers, 7% is basically losing the French and German economies.

Policymakers are worried abour the risk of trade conflicts if Donald Trump wins the US presidential election, as he has talked about introducing a 10% tariff on imports into America.

Reeves to announce major change to fiscal rules releasing £50bn for spending

Larry Elliott

Rachel Reeves will announce at the International Monetary Fund a plan to change Britain’s debt rules that will open the door for the government to spend up to £50bn extra on infrastructure projects.

After weeks of speculation, the chancellor will confirm at the fund’s annual meetings in Washington today that next week’s budget will include a new method for assessing the UK’s debt position – a move that will permit the Treasury to borrow more for long-term capital investment.

The change to the debt rule will be welcomed by the IMF, which says spending on UK infrastructure projects should be ringfenced as the government seeks to repair the damage to the public finances caused by the pandemic and the cost of living crisis.

Reeves will not specify while in Washington which of the various debt measures under consideration has been chosen, but the Guardian has been told by a senior government source that she will target public sector net financial liabilities (PSNFL).

This yardstick – which will replace public sector net debt – will take into account all the government’s financial assets and liabilities, including student loans and equity stakes in private companies, as well as funded pension schemes.

This would give the chancellor room to increase borrowing for investment in long-term infrastructure.

More here:

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

The governor of the Bank of England has declared that UK inflation is cooling more rapidly than expected, as policymakers gather in Washington DC to discuss the state of the global economy.

Andrew Bailey told an event organised by the Institute of International Finance event last night that prices were rising slower than he would have expected.

Bailey explained:

“If you’d ask me what inflation was going to be now, it would have been a bit higher than it is today.”

UK inflation hit a three-and-a-half year low of 1.7% in September, below the Bank’s 2% target.

Bailey’s comments appear to be another hint that the Bank of England could lower interest rates at its meeting next month.

This morning, the money markets predict that a November rate cut, from 5% to 4.75%, is an 89% chance.

Those odds jumped at the start of this month, after Bailey told the Guardian that the Bank could become a “bit more aggressive” in cutting interest rates if inflation continues to cool.

Bailey’s told the IIF last night that “disinflation” (an easing in the rate of inflation) was happening faster than expected, saying:

“Disinflation is happening I think faster than we expected it to, but we have still genuine question marks about whether there have been some structural changes in the economy.”

Bailey is in Washington DC for the annual meetings of the International Monetary Fund (IMF) and the World Bank Group.

UK chancellor Rachel Reeves has headed there too. Before setting off yesterday, Reeves declared she would be presenting next week’s budget as a economic ‘reset’ for the UK:

“A Britain built on the rock of economic stability is a Britain that is a strong and credible international partner.

“I’ll be in Washington to tell the world that our upcoming budget will be a reset for our economy as we invest in the foundations of future growth.

“It’s from this solid base that we will be able to best represent British interests and show leadership on the major issues like the conflicts in the Middle East and Ukraine.”

The agenda

• 9am BST: Eurozone composite PMI surveys for October

• 9.30am BST: UK composite PMI surveys for October

• 11am BST: CBI’s industrial trends survey of UK manufacturing

• 1pm BST: IMF chief Kristalina Georgieva gives main press conference