UK factories report sharpest contraction in nearly a year, PMI shows By Reuters

LONDON (Reuters) – British factory activity contracted at the fastest pace in 11 months in December and manufacturers cut employment levels due to higher taxes and weak foreign demand, a survey showed on Thursday, the latest in a series of weak readings for the economy.

The UK’s global manufacturing PMI fell to 47.0 from 48.0 in November and was below December’s preliminary reading of 47.3.

Rob Dobson, director of S&P Global Market Intelligence, cited a faltering domestic economy, weak export sales and concerns about future cost increases including higher business taxes announced by Finance Minister Rachel Reeves.

The survey’s employment measure was at its lowest level since February as companies faced increasing cost pressures from rising transportation and raw material costs as well as from employers’ Social Security increases that will begin in April.

“With costs expected to rise again in early 2025 as announced budget changes come into force, the Bank of England is likely to remain cautious about further interest rate cuts, despite growing signs of economic difficulties,” Dobson said.

The Bank of England said it would only move gradually with further cuts in borrowing costs while it waits to see whether Reeves’ budget increases inflation pressures.

The PMI found that weak economic growth outside Britain pushed exports to their biggest decline in 10 months and total new orders fell by the most since October 2023.

Britain’s economy lost momentum around the time of the July election that brought Labor to power, and some employers blamed the new government’s pessimistic message about the outlook and then its tax hike announcement.

Data published on December 23 showed that the economy did not grow at all in the three months after the election. The Bank of England did not expect any growth in the fourth quarter either, prompting the opposition Conservative Party to warn of the risk of recession.

The preliminary December PMI in Britain’s dominant services sector showed a slight overall improvement, but employment in both sectors contracted by the most since January 2021.

The final services PMI for last month is scheduled to be published on Monday.