Looming tax rises and persistent cost pressures are sending a ‘winter chill’ into Britain’s factories, as new data reveals the weakest growth in the manufacturing sector in 11 months.
The final global Purchasing Managers’ Index (S&P) for December fell to 47 – down from 48 in November and below the previous estimate of 47.3 – pushing the reading into contraction territory for the third straight month.
The pound fell sharply on the news, falling 1.1 per cent against the dollar to $1,237 and falling 0.35 per cent against the euro to €1,203, as economists warned of continued headwinds for the UK industry. The slowdown has been largely attributed to the government’s bleak economic outlook and an impending set of tax rises, including increases in employer National Insurance contributions and the minimum wage in April 2025.
From that date, the headline rate for employers’ NICs will rise to 15 per cent from 13.8 per cent, and the threshold at which contributions start will shrink to £5,000 from £9,100, effectively saving a £25 billion tax hit to businesses. . Combined with a 6.7 percent hike in the minimum wage, the resulting “winter chill” has eroded demand for manufactured goods and dented employment confidence, according to Rob Dobson, director of Standard & Poor’s Global Market Intelligence.
“Business sentiment is now at its lowest level in two years,” Dobson said. “New government rhetoric and political shifts are weakening confidence and raising costs for factories and their customers. Many companies are now restructuring in preparation for higher employer National Insurance rates and minimum wages in 2025.
As companies prepare for the tax changes, PMI data shows job losses accelerating at the fastest rate in ten months. Overseas sales continued to contract, especially in Europe, the United States and Asia, with total new orders falling at their fastest pace in more than a year.
The broader economic picture remains subdued, with headline growth slowing in the UK in the last half of 2024. GDP contracted by 0.1 per cent in October, and the Bank of England estimates growth stalled in the final quarter. However, some economists remain optimistic that new government spending measures unveiled by the Finance Minister in the Budget will stimulate activity early this year.
“Despite the weak December PMI numbers, we expect steady improvement in 2025,” said Elliot Jordan Doak, chief UK economist at Pantheon Macroeconomics. “While changes in domestic policy such as rising loan interest rates and global uncertainties have undermined confidence, the budget’s focus on spending rather than taxes could provide a boost.”
Outside the UK, the euro zone’s manufacturing sector has been contracting for two-and-a-half years, with the December PMI falling to 45.1 from 45.2. Germany’s reading fell to 42.5, while France’s reading reached its lowest level since May 2020 at 41.9. In contrast, Spain and Greece showed greater resilience and demonstrated relatively stronger manufacturing health.
In China, the Caixin/S&P Global Manufacturing PMI fell to 50.5 from 51.5, missing analysts’ expectations. Investors responded by fleeing Chinese stocks, sparking the worst start to a trading year in Chinese stock markets since 2016. President Xi is expected to unveil more economic stimulus at the Communist Party’s two sessions in March, as Beijing strives to meet its 5 percent target. . Annual growth target.
In the United States, the December manufacturing PMI fell to 49.4 from 49.7 the previous month – although it remained above the previous preliminary estimate of 48.3 – indicating a milder contraction in US factory output.