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Fears of a new tax raid in the Autumn has stalled the economy.
The UK economy stalled in September, according to the S&P Global PMI survey for September, owing to fears of another impending tax raid by the government.
The British pound registered a clear drop against the euro, dollar and other major currencies after the data was released.
The Services PMI, which measures activity in the UK's dominant services sector, slid to 51.9 from 54.2, which was well below the consensus 53.5 that was expected by the market.
Reflecting a fear that the UK economy is slowing faster than had been previously anticipated, the pound to euro exchange rate (GBP/EUR) dipped to 1.1435 from 1.1465.
The pound to dollar exchange rate (GBP/USD) dropped from 1.3525 to 1.3490 in the minutes that followed the publication.
The Manufacturing PMI remains mired in contractionary territory at 46.2, which was below estimates for 47.
The Composite PMI, which balances the data to give a more accurate account of the wider economy, fell from 53.5 in August to 51, undershooting estimates for 52.7.
The details of the report were concerning, with S&P Global saying subdued demand and pressure on margins from sharply rising input costs contributed to another reduction in private sector employment numbers.
The survey's reports of rising costs and rising unemployment reflect the broader trend underway in the economy, where inflation and unemployment are on the rise. The report estimates around 50K jobs were lost in the three months to September.
For the pound, this speaks of stagflationary conditions that are rarely supportive of a currency.
Above: GBP/EUR at 5-minute intervals reflecting the post-PMI selloff.
The PMI report found the outlook facing businesses was challenging, with business activity expectations for the year ahead easing to a three-month low in September, with survey respondents widely commenting on weak client confidence alongside heightened political and economic uncertainty.
"September’s flash UK PMI survey brought a litany of worrying news including weakening growth, slumping overseas trade, worsening business confidence and further steep job losses," says Chris Williamson, Chief Business Economist at S&P Global Market Intelligence.
"Alarm bells should be ringing that the economy is faltering, which could help shift the policy debate at the Bank of England back towards a more dovish stance," he adds.
A 'more dovish' stance implies more interest rate cuts, which should weigh on short-term bond yields and the pound.
Williamson says one explanation for the slowdown is the looming Autumn budget, where the Chancellor Rachel Reeves is set to announce a fresh tax raid, that will again be aimed at the 'investive' sector of the economy owing to the government's manifesto pledge not to raise income tax and VAT.
Taxes will fall on business owners, investors and businesses. This weighs on confidence and lowers investment potential, which is then reflected in a slowing economy and job losses.
"Amid talk of further tax rises being needed in the Budget later this year, it's not surprising to see that business expectations have worsened again in September," says Williamson.
The pound-euro exchange rate is trending lower again and looks ready to test 2025 lows at 1.1413. Pound-dollar is better supported on account of the bigger USD selloff that is underway, Sterling looks set to lag the rally relative to its peers.