Corporate momentum is outpacing the mood on Main Street. S&P Global's purchasing managers index pointed to the strongest private sector growth in eight months in October, and indicated the ongoing rollout of artificial intelligence kept spending supported. The same survey showed a contraction in France, highlighting a split with the UK.
Companies also inched staffing higher - the first net increase in over two years - lining up with an upturn in official labor data released on Tuesday. This resilience is showing up even as oil has pushed past 110 dollars a barrel. "The PMIs have a stronger tone than the recent retail sales and consumer confidence data," according to Paul Dales, Capital Economics' chief UK economist. "Taken together, the overall economy still seems to be weathering higher energy prices and higher borrowing costs well, and the worst of the rise in inflation is yet to come."
Households are in a funk. GfK's tracker dropped 11 points to -24 in October, a drop comparable in size to the immediate post-Brexit referendum slide in 2016. Official figures showed retail sales down 0.4% in September, which economists said could be an early sign that rising household energy bills and the price of motor fuel are prompting belt tightening.
Annual price growth rose to 3.5% in September, an 11-month high, and the Bank of England projects inflation will exceed 4% early next year. With a Nov. 5 rate increase likely and energy bills expected to rise in January, households - already saving a historically high share of income - may have even less to spend over winter. "As consumer spending accounts for 60% of GDP, stalling real consumption growth is a key reason for the slowdown in growth which we anticipate," said Andrew Wishart, UK economist at Berenberg. He said Friday's confidence and retail sales data "could be the first signs that the long-awaited squeeze on consumer spending from the Iran war is materializing."
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Prime Minister Andy Burnham has pledged to ease cost pressures, but the global energy shock limits quick fixes. Chancellor John Healey is slated to unveil new policies on Oct. 28, and in his Wednesday budget speech he will likely point to a 2026 growth outlook that the Office for Budget Responsibility has upgraded. Monthly GDP figures show the economy grew by 1.8% during January through August, defying forecasts that momentum would fade as the impact of the US-Iran war erodes household budgets.
Healey is expected to deliver a "do no harm" budget that does not drain the momentum of firms stepping up investment. To prevent damaging speculation and chatter about tax hikes before the UK's flagship fiscal announcement, the Treasury has moved to clamp down on leaks, mindful that confidence was shaken by the build-up preceding Labour's first two budgets.
Two tracks are running at once: firms still spending and nudging up hiring, and consumers retrenching as prices and rates climb. That mix can support growth for a while, but a downbeat consumer can eventually weigh on revenues for retailers, discretionary brands, and other demand sensitive sectors. The bottom line: watch exposure to UK demand as Oct. 28 policies, a likely Nov. 5 rate increase, and January energy bills shape the path for spending and earnings.
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