With speculation about the Autumn Budget only likely to intensify from here, and tariffs and trade wars firmly back on top of the agenda, the UK economy is in for another period of heightened uncertainty for at least the next six weeks. There’s some evidence this is already having a detrimental effect on the UK economy. The big risk is that this increases and results in a repeat of the economic stagnation we endured in the second half of last year.

Certainly, it looks like the Chancellor will have to raise £25–30bn when she takes to the despatch box on 26 November. We’re increasingly confident about that range. The Treasury has had the OBR's last pre-measures economic forecast for over a week now and there's been no counter-briefing to try to shift the narrative in either direction.

Many expect the bulk of the shortfall to be met through higher taxation, predominantly on households.

The economic impact of those tax rises will depend mainly on two factors. First is timing and when the tax rises will come. More tax rises later in the parliament will have a smaller impact in the near-term, but will be regarded as less believable by financial markets. Second is how the sums will be raised. Taxes such as duties and those on businesses will raise inflation at the same time as dampening growth, as we explain here.

UK economic uncertainties hit property and consumer spending

Uncertainty generated by speculation about the size, timing and type of taxes is arguably already having a dampening effect right now on consumer spending and business investment.

As if that wasn’t enough, the recent announcement of EU steel tariffs, which would be much more significant for the UK steel industry than US ones, and the re-ignition of the trade war between the US and China, which on Friday caused the largest drop in equity markets since the initial tariff announcement in April, have pushed trade uncertainty back to the top of the agenda.

It’s not difficult to find evidence of this dampening effect in the survey data. The Composite PMI, which is a long-standing business survey, fell sharply in September. Lloyds’s business sentiment survey also dropped sharply in September to its lowest level since the last Autumn Budget in April. Consumer confidence dropped too last month and has yet to recover from last September’s post-election slump.

We’ve previously covered the impact of low consumer confidence on households’ willingness to spend. The Bank of England has also recently highlighted this link, suggesting that it’s particularly important for households in the top half of the income distribution curve, which make up two-thirds of consumer spending.

Perhaps the most obvious impact, though, has been on the housing market where house prices have unexpectedly fallen and mortgage approvals have been dropping. The impact has been particularly obvious in London, where house prices are almost double the national average and would be hit hardest by any 'mansion' tax. According to the well-followed UK Residential Market Survey (RICS), the number of new buyer enquiries in London fell sharply in September and new seller instructions dropped to a 14-month low.

How much are global political headwinds buffeting UK growth?

Admittedly, not all of this can be blamed on speculation ahead of the Autumn Budget. Business surveys have been similarly weak in the eurozone. Much of the decline in consumer confidence is also largely explained by the increases in inflation and the unemployment rate. (Ask to see our Misery Index if you’re interested in consumer confidence.)

What’s more, the economy seems much less susceptible to uncertainty around trade tensions than it does to domestic matters. The economy shrugged off uncertainty after the Brexit vote to continue growing and growth was surprisingly strong in Q2 this year, despite the huge uncertainty around tariffs. Indeed, equity market volatility and consumers’ perceptions about the economy are much more closely correlated with GDP growth than measures of trade uncertainty. This suggests the latest round of trade uncertainty may not be as bad for the UK as we might have initially expected.

That said, uncertainty is bad for business investment in the longer term. And it was no coincidence that the economy stagnated in the second half of last year in the face of big elections in the UK and the US and the subsequent anticipation of the Autumn Budget. The risk is clearly that as speculation about the size of the Autumn Budget intensifies over the next few weeks and months, the corresponding impact on the economy becomes worse. Throw in a trade-war-sparked equity market rout and it’s not difficult to see another round of stagnation.

The labour market will probably show further signs of stabilising – albeit at a weak level – when the latest employment and payrolls data is released on Tuesday. Wage growth is also likely to continue its marginal slowing.

The unemployment rate likely stayed at 4.7% in August. Admittedly, the response rate to the Labour Force Survey, where the official employment statistics are derived from, remains low. However, it is improving, alongside its sample size.

Payrolls data will also likely show signs of stabilising. The magnitude of falls in payrolls numbers is reducing and we think firms have finished most of their headcount adjustments in response to the employers’ National Insurance Contributions (NICs) rises in last autumn’s budget. We anticipate a -8k drop for September’s initial estimate and an upwards revision to August’s -8k fall.

On pay growth, our assessment expects private sector pay, excluding bonuses – the Monetary Policy Committee’s (MPC) preferred measure of pay growth because it’s most reflective of underlying inflationary pressures – will show another small drop to 4.5%.

Looking ahead, we think the combination of sticky pay growth and a stabilising jobs market will be more than enough to convince the MPC to focus on the risks from another period of above-target inflation. The upshot of this being we expect rates to stay on hold for the rest of the year.

We think the economy probably grew by 0.1% in August after stagnating in July.

Starting with the production industries, we see more uncertainty than usual. The manufacturing sector collapsed in July. While much of that should rebound in August, data from the Society of Motor Manufacturers and Traders (SMMT) suggests vehicle production was even weaker than usual. We look for a small 0.3% gain, before another downturn in September as the Jaguar Land Rover shutdown drags on growth.

Another cause of uncertainty comes from the mining sector. The Buzzard oil field, which is the biggest contributor to production of Forties oil, closed for maintenance in August. It prompted Forties oil loadings to collapse. Fortunately, increased output from other fields has filled some of that shortfall. The ONS will seasonally adjust away much of the weakness in mining production because shutdowns are common in August. All in, we think the production sector probably did little more than stagnate in August.

Meanwhile, the Construction PMI has been dismal for a while now and far below the official data. However, we think at least some of the huge 4.5-point fall in the index is genuine. Indeed, the survey recovered less than half of that in September.  So, we pencil in a -0.3% drop, but acknowledge that above-average temperatures and below-average rainfall in August pose an upside risk here.

Turning to the all-important services sector, we look for a 0.2% gain on the month. Retail sales rose 0.5% on the month, which will boost the official data. Meanwhile, the CGA RSM Hospitality Business Tracker showed total sales growth accelerating to the fastest annual rate this year, excluding April.

Elsewhere, business services likely roared back to life in August. The IT, professional and business services, and administrative sectors all saw output fall in July and should bounce back. What’s more, the Services PMI, which tracks private sector firms, excluding the retail sector, rose strongly in August. Here, monthly changes have been a more reliable predictor of growth than usual. Therefore, we think those three sectors alone add 0.1ppts to GDP growth in August and services output will rise 0.2% m/m.

Ultimately, the economy probably saw marginal expansion in August, which will be enough to lift the economy to 0.1% growth, even if the economy looks like it lost momentum again in September.

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