Budget borrowing to add ‘additional challenge’ to UK finances, says leading rating agency – business live

The UK manufacturing industry fell into contraction in October as companies paused investments ahead of the budget, according to the closely followed purchasing managers’ index (PMI).

The final reading for British manufacturing dropped to 49.9 points in October, according to S&P Global, below the 50 index level that marks a contraction. The initial “flash” reading had been 50.3.

It was the first time since April that manufacturing activity had contracted, S&P said.

Rob Dobson, director at S&P Global Market Intelligence, said:

UK manufacturing started the final quarter of the year on an uncertain footing amid speculation on government policies ahead of the Budget, which was widely reported to have led to a wait-and-see approach on investment and spending.

This domestic headwind, combined with an ongoing loss of export business, led to the first outright contraction in new work intakes since April. Output growth came close to stalling as a result.

Another of the big three rating agencies has published its verdict on the UK budget: S&P Global Ratings said that the UK’s fiscal position is “constrained” – but it also said that public investments – particularly in the health service – could create a “more business-friendly environment”.

The UK faces “elevated budgetary deficits and net general government debt level”, S&P said – although it did not raise its forecasts for budget deficits because it had already taken into account “lingering public spending pressures”.

Chancellor Rachel Reeves’s new fiscal rules gained the unusual backing of the International Monetary Fund this week, because they allow for increased investment. However, S&P said that the rules presented “mixed messages” because they allowed for greater spending, but also that they are more credible on cutting future deficits because they require debt to be government debt to falling within three years. (Previous rules had a five-year timeframe, which meant governments could up load notional tax rises in the future, knowing they were unlikely to have to deal with it themselves.)

The key test of success for Reeves will be growing the economy, S&P said:

The front-loading of spending will mechanically boost growth in the short term, but it’s too early to tell how much this will add to potential output in the long term. On the positive side, investments in infrastructure and planning reforms should create a more business-friendly environment; an improved health service should help bring people back to work as current inactivity remains mainly linked to people who are off sick; and education and childcare investments should improve workers’ skills in the long term. Nonetheless, reaping those potential benefits will also depend on whether the spending is deployed in an effective way.

S&P underlined that Reeves and Starmer have gambled on higher spending generating increased growth. If that does not happen it could prove tricky for the UK:

A hypothetical scenario in which public spending is permanently higher but the quality and accessibility of public services still doesn’t improve enough, could further complicate policy trade-offs in the future. Conversely, a faster improvement in public services could yield greater dividends in terms of lower future pressures and positive growth repercussions.

The UK government’s increased borrowing will give an “additional challenge” to the public finances, according to influential rating agency Moody’s.

UK gilt yields, effectively the price at which the government can borrow, rose to their highest level this year on Thursday afternoon as markets responded to Rachel Reeves’s budget – the first by a Labour government in 14 years. Investors were responding particularly to the prospect of about £28bn in extra borrowing.

Moody’s said that the budget would not do much to boost UK economic growth, and that there was only a limited buffer if the country faces further financial shocks, in a further sign of the wariness of financial markets towards the government’s plans.

In a note sent to investors, reported by the Financial Times, Moody’s said:

In our view, the increase in borrowing, which is in part supported by a new measure of debt under the fiscal framework, will pose an additional challenge for what are already difficult fiscal consolidation prospects. […]

Furthermore, the extent to which new investment spending can raise growth potential will be limited unless structural constraints are durably addressed which will prove difficult.

Moody’s is one of the three major ratings agencies, alongside S&P and Fitch. Their economists are not privy to any special information or insight on sovereign debt, but their assessments tend to be influential among bond investors

Changes to stamp duty by Rachel Reeves in the budget mean we should expect a rush of UK property transactions in the new year until the end of March, according to Nationwide.

That will probably be followed by a period with fewer transactions in the months afterwards.

The chancellor’s decision to remove the temporary increase to the nil rate for stamp duty next April could spark a rush to complete purchases before the changes.

In September 2022, the government temporarily increased the nil rate of stamp duty, the amount before you have to start paying stamp duty on a purchase, for homebuyers, raising the nil rate for first-time buyers from £300,000 to £450,000, and for those buying an additional home from £125,000 to £250,000.

Robert Gardner, Nationwide’s chief economist, said:

The main impact of the stamp duty changes is likely to be on the timing of property transactions, as purchasers aim to ensure their house purchases complete before the tax change takes effect.

This will lead to a jump in transactions in the first three months of 2025 (especially March), and a corresponding period of weakness in the following three to six months, as occurred in the wake of previous stamp duty changes.

Good morning, and welcome to our live coverage of business, economics and financial markets.

UK house price growth slowed in October ahead of Wednesday’s budget, surprising economists who had expected faster increases, according to one of the key measures collected by a lender.

House prices grew by 0.1% in October, according to the Nationwide building society. That was less than the 0.3% rate that economists polled by Reuters.

The annual rate of growth slowed from 3.2% in September to 2.4% in October, below the 2.8% expected by economists.

Robert Gardner, Nationwide’s chief economist, said:

Housing market activity has remained relatively resilient in recent months, with the number of mortgage approvals approaching the levels seen pre-pandemic, despite the significantly higher interest rate environment.

UK debt yields revisit year high after budget

UK bond yields once more touched their highest point this year on Friday, as investors continued to digest the implications of the first Labour budget in 14 years.

The yield – effectively the UK government’s borrowing cost – on the benchmark 10-year bond reached 4.526% in global trading on Friday, matching the level hit on Thursday in the aftermath of Rachel Reeves’s budget statement as investors predicted a slower pace of interest rate cuts from the Bank of England. Since then it has fallen back slightly to 4.456%.

Scrutiny of bond market movements has been particularly intense after the budget because of the large borrowing set out by Reeves, alongside major tax increases. However, while there has been a noticeable reaction in the market for UK government bonds, also known as gilts, it has not so far been comparable to the turmoil following the budget of Liz Truss and Kwasi Kwarteng in 2022.

The below chart shows the UK 10-year gilt yield over the last three months: yields (which move inversely to prices) have risen appreciably, but the post-budget movements have not been dramatic.

We will update throughout the day on movements.

The agenda

• 9:30am GMT: S&P Global UK manufacturing purchasing managers’ index (October; final reading; previous: 51.5; consensus: 50.3)

• 12:30pm GMT: US non-farm payrolls (October: prev.: 254,000 new jobs; cons.: 113,000)

• 12:30pm GMT: US unemployment (October: prev.: 4.1%; cons.: 4.1%)