UK factory output falls at fastest pace since February amid concerns about tax hikes | manufacturing sector

British manufacturers have cut production at the fastest pace in 11 months, deepening the grim picture for the UK economy, a closely watched survey has found.

The manufacturing Purchasing Managers' Index (PMI) fell to 47 in December, down from 48 in November and the lowest reading since February. A number below 50 indicates shrinkage.

Sterling fell in foreign exchange markets after the news broke, highlighting the challenges facing the Labor government as it hopes to revive the economy.

By mid-afternoon in London, the pound had fallen nearly 1% against the dollar to $1.24, its lowest since April. The dollar has strengthened more broadly in recent weeks ahead of Donald Trump's arrival in the White House.

S&P Global Market Intelligence, the data company that compiles PMI, blamed government policies for the squeeze on manufacturing.

Rob Dobson, director at S&P Global, said: Manufacturers are facing an increasingly bleak situation. Business sentiment is now at its lowest level in two years as the new government's rhetoric and announced policy changes have eroded confidence and increased costs for both British factories and customers.

He added that small and medium-sized businesses are being hit the hardest. The survey found staffing levels are declining at the fastest rate since February.

Businesses are set to face higher tax bills from April after Prime Minister Rachel Reeves announced a rise in employer National Insurance Contributions (NICs) to fund public services.

The NIC increase, which is expected to raise $25 billion by the end of this parliament, will coincide with a nearly 7% increase in the living wage for people over 21, to $12.21 per hour.

Some businesses are now taking steps to restructure their operations ahead of increases in employer national insurance and minimum wage levels in 2025, Dobson said.

Labor came to power in July's general election promising to fix the economic foundations and achieve the strongest and most sustained growth among the G7 countries.

With little evidence of improvement, Keir Starmer has recently shifted his focus to improving living standards. The Prime Minister said voters will have more cash in their pockets in his New Year message.

The economy was already expected to slow in the second half of last year as the Bank of England kept interest rates high to tackle inflation. Uncertainty about the impact of Trump's re-election is also likely to have added to the pessimistic mood.

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According to revised gross domestic product (GDP) figures released by Statistics Korea at the end of December, the economy appeared to have stagnated in the third quarter of 2024. The bank expects GDP to remain flat in the final three months of the year.

The combination of weak GDP and strong wage growth has sparked concerns that Britain could slide into stagnant economic growth and sharp inflation. This will be a difficult challenge for policymakers.

The bank's nine-member Monetary Policy Committee (MPC) cut interest rates to 4.75% in November, and policymakers are expected to closely monitor the impact of the NIC increase.

Business groups have reacted with disappointment to Reeves' budget package of tax hikes, with some calling on Labor to scale back plans to strengthen workers' rights.

The Confederation of British Industry announced in December that the economy was headed for the worst, predicting a sharp decline in activity in the first quarter of this year.

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