Pound falls to 37-year low against dollar ahead of mini-budget; UK consumer confidence weakest on record – business live

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Britain’s private sector is shrinking at the fastest pace since the Covid-19 lockdowns of January 2021, data just released shows.

The Flash UK PMI Composite Output Index, which tracks activity across the economy, has dropped to 48.4 this month, which is a 20- month low.

That’s down on August’s 49.6 – any reading below 50 points shows the economy contracted. It’s another sign that the UK economy is in recession.

The report shows that cost pressures remain high and demand waned. Services sector firms contracted this month, for the first time since February 2021, while manufacturing continued to shrink.

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

UK economic woes deepened in September as falling business activity indicates that the economy is likely in recession.

Companies report that the rising cost of living, linked to the energy crisis, and growing concerns about the outlook are subduing demand and hitting output levels to an extent not seen since 2009, barring the pandemic lockdowns and initial 2016 Brexit referendum shock.

Firms were hit by the fastest fall in new business in 20 months (again, since the winter lockdowns of 2021).

Export orders fell at a “sharp and accelerated rate”. Goods producers suffered the sharpest drop in foreign demand for 28 months and services companies were hit by the first reduction since December 2021.

The PMI survey also shows that inflationary pressures are running hotter than at any time in the survey’s history, before the pandemic.

Those cost pressures are being driven by the weaker pound – which pushes up import costs, as well as ongoing supply chain problems and soaring energy prices.

Kwasi Kwarteng is about to deliver the mini-budget – my colleague Andew Sparrow is live-blogging all the details here:

Sterling is continuing to hit new lows against the dollar (which is strengthening against other currencies too this morning).

The pound has now dropped by a cent this morning, to as low as $1.1165.

Steve Clayton, fund manager at HL Select, explains:

The US dollar continues to climb as investors look to the safe haven of the world’s most liquid asset at a time of economic and political turmoil. The flip side of that is weakness in other currencies.

This morning a euro buys you just 98USc, a decisive break below parity with the dollar. Brits contemplating transatlantic trips might want to run the numbers one more time, because a pound sterling now buys just $1.12, almost 20% less than it did a year ago.”

The downturn in the wider eurozone has also deepensed this month, as price pressures intensify.

Business activity in the euro area is contracting for a third consecutive month, the flash PMI survey from S&P Global shows.

They warn:

Although only modest, the rate of decline accelerated to a pace which, barring pandemic lockdowns, was the steepest since 2013.

Forward-looking indicators, such as new order inflows, backlogs of work and future output expectations, point to the decline gathering further momentum in coming months.

Germany’s economic downturn has deepened this month, as businesses were hit by soaring energy costs and a drop in new business.

Germany’s services firm, and its manufacturing sector, both contracted this month according to a ‘flash’ reading from data provider S&P Global.

Demand for goods and services deteriorated rapidly this month, due to surging energy costs and an increasingly uncertain outlook.

The data suggests Germany is heading towards recession – and has knocked the euro to a new 20-year low against the dollar, further below parity.

Phil Smith, economics associate director at S&P Global Market Intelligence, said:

“The German economy looks set to contract in the third quarter, and with PMI showing the downturn gathering in September and the survey’s forward-looking indicators also deteriorating, the prospects for the fourth quarter are not looking good either.

The deepening decline in business activity in September was led by the service sector, which has seen demand weaken rapidly as customers pull back on spending due tightening budgets and heightened uncertainty about the outlook.

ING predict the pound will continue to lose ground against the US dollar, and could hit $1.10 in the next month (it’s currently $1.119 after this morning’s drop).

ING’s global head of markets, Chris Turner, says investors have doubts about the government’s plans:

“Sterling net-net was a little lower after yesterday’s divided Bank of England hike.

Today sees the big reveal of Chancellor Kwasi Kwarteng’s ‘fiscal event’. As noted recently, typically looser fiscal and tighter monetary policy is a positive mix for a currency – if it can be confidently funded. Here is the rub – investors have doubts about the UK’s ability to fund this package, hence the Gilt underperformance.

“With the BoE committed to reducing its Gilt portfolio, the prospect of indigestion in the Gilt market is a real one and one which should keep sterling vulnerable.

Sterling isn’t very impressed by Kwasi Kwarteng’s plans, says Neil Wilson of Markets.com.

The widening trade deficit, which rose to almost an all-time high ?27bn in the three months to July, is one half of a twin deficit that leaves traders bearish on the pound.

And all these tax cuts won’t help the other half of the UK’s twin deficit – the budget deficit – and it could lead to further re-pricing for sterling.

Wilson adds that “abandoning any semblance of fiscal discipline” is not usually a recipe for long-term confidence in the country’s assets.

Derek Halpenny, head of research at MUFG, said in a note he sees risks the pound could fall further over UK government policies that could possibly “lack credibility”.

Halpenny adds that the mini-budget could raise concerns over external financing pressures as “the budget and current account deficit combined looks to be heading to around 15% of GDP.”

Of the international banks and research consultancies polled by Reuters last week, 55% said there was a high risk confidence in British assets would deteriorate sharply in the coming three months.

Kwasi Kwarteng’s (expected) pledge to “turn the vicious cycle of stagnation into a virtuous cycle of growth” hasn’t sparked much excitement in the City.

The blue-chip FTSE 100 index has lost 0.6% this morning, dropping to its lowest since mid-July.

The smaller FTSE 250 index – which is more domestically-focused – is 0.2% lower. It’s seen as a better barometer for UK trading and prospects – and has shed a fifth of its value so far this year.

Richard J Hunter, head of markets at Interactive Investor, explains:

The FTSE 250 index has lost 22% so far this year, with the latest 0.5% rate hike from the Bank of England adding to tightening concerns at a time when growth is flat to non-existent.

It is expected that the government will unveil a new “fiscal event” later in a mini-budget which should involve tax cuts and increased spending in an attempt to stimulate growth. It remains to be seen how effective such moves might be, given the wider pressures affecting economies globally.”

This chart shows the pound’s fall towards the record low set in 1985.

Sterling has dropped to a fresh 37-year low against the US dollar – an unwelcome backdrop to Kwasi Kwarteng’s mini-budget this morning.

The pound has fallen below $1.12, the weakest point since 1985, and has now shed 17% against the dollar so far this year.

The decline is partly due to dollar strength – the greenback is at 20-year highs against a basket of currencies, due to worries about the global economy and the series of large interest rates by the US Federal Reserve.

But it’s also due to concerns over the UK economy as it teeters towards recession.

Investors are anxious that Kwarteng’s mini-budget will drive up borrowing – especially as the Office for Budget Responsibility has not been allowed to provide forecasts for today’s event.

RBC Capital Markets say markets are left to speculate on “who has the appetite for gilts when the BoE is selling and the govt is ramping up borrowing at a dizzying pace”.

They forecast that the pound could fall even lower, to below $1.05 – which would be an all-time low.

For us, it leaves weaker GBP [the pound] as the clearest escape valve to keep financing a large current account deficit.

Our forecast is currently sub-1.05 for GBP/USD. If the Chancellor’s gamble to boost growth fails to pay off, it will leave GBP in an even bigger hole.

Simon Clarke, the Secretary of State for Levelling Up, has denied that the government’s fiscal plans are a gamble.

On this morning’s media rounds, Clarke told the BBC that tax cuts will spur economic growth that outstrips rising national debt.

“The evidence of the 1980s and the 1990s is that a dynamic low tax economy is what delivers the best growth rates – this isn’t a gamble, the weight of history and evidence is with us.”

Clarke also told Sky News that the budget will be a game-changer, and that growth will pay for the UK’s government spending plans

Asked if his view last year that some tax increases would be needed to repair government finances still applied, Clarke said:

“No, because what you’re doing now is that you’re going for growth…

The critical thing is we need to get the economy growing so that, frankly, the economic growth trajectory outstrips that of our debt.”

Here are more details of the slide in consumer confidence this month:

IFS director Paul Johnson has calculated that the mini-budget could be biggest tax-cutting fiscal event since Nigel Lawson’s Budget of 1988.

Kwasi Kwarteng will on Friday announce 30 separate measures – including tax cuts, new investment zones and an acceleration of infrastructure projects – in an effort to raise the economy’s growth rate to his stated target of 2.5% a year.

One of the main elements of the package – the ?13bn reversal of the increase in national insurance contributions, introduced in April to fund the health and social care levy – will come into force on 6 November.

While almost 28 million people will keep more of their earnings as a result of the move, the Resolution Foundation thinktank said on average the poorest 10% of households would gain ?11.41 in 2022-23, while the richest 10% of households would gain ?682.

The mini-budget is expected to contain significant further interventions to boost growth beyond the reversal of the NICs rise and next April’s planned increase in corporation tax, Treasury sources have confirmed, with one Whitehall source describing the package as having “more rabbits than Watership Down”.

One key plank of the fiscal event will be new investment zones for 38 local and mayoral authorities in England – including West Midlands, Tees Valley, Somerset and Hull – which will have major planning deregulation to release more land for housing and commercial development, and tax cuts for businesses.

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

Consumers across the UK are the gloomiest on record as the economic picture darkens… as the government announces its plan to kick-start UK economic growth with a flurry of tax cuts that will drive up borrowing.

People are increasingly worried about their personal finances, and anxious that the economy is turning sour, research body GfK warns, a day after the Bank of England said the UK has probably entered recession this quarter.

GfK’s long-running Consumer Confidence Index has fallen another five points this month to a new low of -49.

That’s the worst since records began in 1974, as the tightening squeeze on living costs made people much more pessimistic about their own finances.

This is the fourth new low in five months, as the economy has been battered by rising prices and weakening activity.

Confidence in personal finances over the coming year shed nine points to -40, while confidence in the economy over the next 12 months lost eight points to -68, a really grim reading.

People are also very unwilling to buy big ticket items, as soaring inflation forces households to cut back.

GfK client strategy director Joe Staton said:

“Consumers are buckling under the pressure of the UK’s growing cost-of-living crisis driven by rapidly rising food prices, domestic fuel bills and mortgage payments.

“They are asking themselves when and how the situation will improve.

Kwasi Kwarteng will vow to break the UK’s “cycle of stagnation” today, by lowering the tax burden in a hotly awaited mini budget..

He’s expected to tell MPs that Britain needs a new approach, ‘focused on growth’, by saying:

“Growth is not as high as it needs to be, which has made it harder to pay for public services, requiring taxes to rise.

“This cycle of stagnation has led to the tax burden being forecast to reach the highest levels since the late 1940s.

Even though today’s statement is officially only a ‘fiscal event’, it’s expected to include a 30-point growth package, including scrapping a planned increase in corporation tax from 19% to 25%, plus reforms to the City of London, ending the cap on bankers’ bonuses, and plans to create up 38 new Investment Zones across England.

Yesterday Kwarteng said the national insurance increase introduced earlier this year will be reversed from 6 November.

But economists are warning tht the plan will drive UK borrowing sharply higher, just as government borrowing costs are rising in the bond markets.

The Institute for Fiscal Studies warned this week that Britain’s mounting debts will be unsustainable if the government presses ahead with sweeping tax cuts.

GfK’s Staton points out that today’s mini-budget, and the longer-term agenda to drive the economy, are a major opportunity to improve the economic outlook.

It will also be a major test for the popularity of Liz Truss’s new Government.”

We also find out today how manufacturing and services companies in the UK, the US, and across the eurozone, are faring this month – and get a healthcheck on Britain’s retail sector.

Financial markets are subdued, as investors worry that interest rate hikes by central bankers are pushing major economies towards recession.

9am BST: Eurozone flash PMIs for September

9.30am BST: UK flash PMIs for September

9.30am BST: Chancellor Kwasi Kwarteng presents mini-budget

11am BST: CBI Distributive trends survey of UK retailers