Caution creeps in ahead of the Budget

The stoic philosopher Seneca famously said that we suffer more in our imaginations than in reality. Which is why if you hint vaguely at bad stuff – say, a Budget full of tax hikes – people assume the worst and hit pause on big decisions.

The effects of this are now everywhere. Tom Bill shared evidence of increasing caution among buyers in prime London on Monday. We'd expect that – it's a discretionary market – but we're now seeing it right across both the mainstream housing market and the broader economy. UK house prices dipped 0.3% in September, the first monthly fall since May, Halifax reported yesterday. The annual rate of growth dipped to 1.3%, which is the weakest since April 2024.

Weaker falls

UK construction activity also fell in September, which is the ninth consecutive contraction, though the rate of declines appears to be slowing, according to a new S&P Global construction PMI. The slower reduction in overall activity was helped by a weaker fall in residential building work, which may be reaching its nadir. 

Residential developers are acting with caution, whether in the land market or when it comes to initiating new projects. Without knowing the extent and scope of tax rises in the Budget, they can't know the likely strength of consumer purchasing power two months from now, never mind further out. The government has initiated reforms to the planning system that will result in increasing numbers of consents – promoters in the so-called 'grey belt' are particularly active – but developers won't build them unless they're confident they can sell the homes upon completion. 

"Survey respondents reported caution among clients ahead of the Autumn Budget and a general reluctance to commit to major capital expenditure projects against a subdued domestic economic backdrop," said Tim Moore, Economics Director at S&P Global Market Intelligence. "Construction companies remained cautious about the near-term outlook and have yet to see a turning point on the horizon."

Deferred decisions

The broader services PMI told a similar story. Business activity rose at the slowest pace in five months during September – the index sank to 50.8, below analysts' estimates of 51.9 and just above the 50 reading that separates growth from contraction. 

"This summer's acceleration in output growth is now looking like a flash in the pan as elevated political and economic uncertainty has reasserted itself as a constraint on service sector performance," Moore added. "Many survey respondents suggested that corporate clients had deferred spending decisions until after the Autumn Budget, while households were also hesitant about major purchases."

Services businesses have now cut jobs for each of the past 12 months while companies' costs were rising more slowly than before, according to the PMI, which will support dovish views on the Bank of England's Monetary Policy Committee. Separate figures published by the Bank last week showed that British businesses have the weakest hiring intentions since 2020. 

Guessing games

If you were hoping this will all go away once the Budget is out of the way, I've got bad news for you. Of course, households and investors will move ahead with plans they've put on hold once there's more clarity, but without a larger reset in November, we'll all remain stuck in a long-running guessing game over the government's tax-and-spend decisions.

The wafer-thin £9.9bn of headroom Chancellor Rachel Reeves left herself against her key borrowing rule at the last two fiscal events lies at the core of the problem. Pimco and Blackrock, two of the world's largest bond investors, have issued pleas to Reeves to build a larger buffer: 

“If you have to drive from here to somewhere 50 miles away, don’t have 50 miles worth of petrol,” Andrew Balls, Pimco’s chief investment officer for global fixed income, told the FT. Yet, an incoming productivity downgrade from the OBR has already left a fiscal hole of about £30bn according to most estimates – filling that and rebuilding a buffer will come with eye-watering political costs.

Government officials continue to show no signs that they will look again at the fiscal rules. This is understandable – the ministers are haunted by the ghost of the mini-budget – but it feels like something has to give. During that fiasco, it took almost a week for the Bank of England to step in, and clearer signals that the central bank will act to prevent a disaster will be necessary if Reeves is to dig her way out of this hole in any enduring sense, Adam Tooze wrote in the FT yesterday. 

"Such a concordat will not by itself restore sanity to politics, solve the housing problem or rebuild the NHS.," he added. "But it would help to lift the fear of bond market crisis, which is paralysing the effort by democratic politicians to answer the fundamental questions facing the nation."

In other news...

Luxury London apartment building draws influx of US billionaires (FT).