UK budget worries weigh on factory activity, PMI shows

By William Schomberg

LONDON, Oct 1 (Reuters) - British manufacturers turned much more pessimistic in September on worries about the new government's first budget combined with concerns about conflict in the Middle East and strong inflation pressures, a survey showed on Tuesday.

The S&P Global UK Manufacturing Purchasing Managers' Index edged down to 51.5 - matching the preliminary September estimate - from a more than two-year high of 52.5 in August.

The PMI's measure of business optimism about the year ahead tumbled to a nine-month low.

"The extent of the drop in confidence was striking, beaten only by that seen in March 2020 prior to COVID lockdowns," said Rob Dobson, director at S&P Global Market Intelligence.

"Uncertainty about the direction of government policy ahead of the coming Autumn Budget was a clear cause of the loss of confidence, especially given recent gloomy messaging, though firms are also worried about wider global geopolitical issues and economic growth risks."

Prime Minister Keir Starmer and his finance minister Rachel Reeves have warned of the need for higher taxes in the Oct. 30 budget and they have also talked about the dire state of the economy that they inherited from the previous government.

Recent surveys of consumer confidence have also shown a drop.

The manufacturing PMI showed export orders dropped again, due in large part to economic weakness in France and Germany, extending their nearly three-year run of falls.

But inflation pressures picked up with input prices rising by the most in 20 months.

"Price pressures are also becoming a more prominent feature of the survey and a reminder that the inflation genie is not yet back in the bottle," Dobson said.

"Freight cost rises are a big factor underlying the resurgence in the price measures, as supply chains continue to feel the strain of the Red Sea crisis and global conflicts."

The Bank of England has said it is waiting for signs that inflation pressures are fully contained before it cuts interest rates again, although its focus is mostly on prices in the services sector. (Reporting by William Schomberg; Editing by Hugh Lawson)