Looming tax increases and ongoing cost pressures are sending a “winter chill” through Britain’s factories, as new data reveals the weakest manufacturing growth in 11 months.
The final S&P Global purchasing managers’ index (PMI) for December slipped to 47—down from 48 in November and below an earlier estimate of 47.3—pushing the reading further into contraction territory for the third consecutive month.
Sterling fell sharply on the news, dropping 1.1 per cent against the dollar to $1.237 and declining 0.35 per cent against the euro to €1.203, as economists warned of continued headwinds for UK industry. The slowdown has been largely attributed to the government’s gloomy economic outlook and an impending raft of tax hikes, including rises to employers’ national insurance contributions (NICs) and the minimum wage in April 2025.
From that date, the main rate of employers’ NICs will rise to 15 per cent from 13.8 per cent and the threshold at which contributions begin will shrink to £5,000 from £9,100, effectively delivering a £25 billion tax blow to businesses. Coupled with a 6.7 per cent rise in the minimum wage, the resulting “winter chill” has eroded demand for manufactured goods and dented hiring confidence, according to Rob Dobson, director at S&P Global Market Intelligence.
“Business sentiment is now at its lowest level in two years,” said Dobson. “The new government’s rhetoric and policy shifts are dampening confidence and raising costs for factories and their clients. Many firms are restructuring now in preparation for higher employer national insurance rates and minimum wage levels in 2025.”
As firms brace for tax changes, the PMI data shows job losses accelerating at the fastest rate in ten months. Overseas sales continued to contract, particularly in Europe, the United States and Asia, with overall new orders falling at their quickest pace in over a year.
The broader economic picture remains subdued, with headline UK growth slowing in the latter half of 2024. Gross domestic product contracted by 0.1 per cent in October, and the Bank of England estimates that growth stalled in the final quarter. However, some economists remain optimistic that new government spending measures unveiled by the Chancellor at the budget will stimulate activity early this year.
“Despite December’s weak PMI figures, we anticipate a steady improvement in 2025,” said Elliott Jordan-Doak, senior UK economist at Pantheon Macroeconomics. “While domestic policy changes such as NIC hikes and global uncertainties have undermined confidence, the budget’s emphasis on spending over taxation could provide a lift.”
Outside the UK, the eurozone’s manufacturing sector has been contracting for two and a half years, with the December PMI inching down to 45.1 from 45.2. Germany’s reading dropped to 42.5, while France’s reached its lowest level since May 2020 at 41.9. By contrast, Spain and Greece showed more resilience, displaying comparatively stronger manufacturing health.
In China, the Caixin/S&P Global manufacturing PMI edged down to 50.5 from 51.5, missing analyst expectations. Investors responded by fleeing Chinese equities, leading to the worst start to a trading year on Chinese stock markets since 2016. President Xi is expected to unveil further economic stimulus at the Communist Party’s Two Sessions in March, as Beijing strives to meet its 5 per cent annual growth target.
Over in the United States, December’s manufacturing PMI dipped to 49.4 from 49.7 the previous month—though it remained higher than the earlier flash estimate of 48.3—hinting at a more moderate contraction in American factory output.
