Time to wrap up…

Chancellor Rachel Reeves has confirmed she will change the measure of public debt that the government targets in next week’s budget in order to allow more borrowing for investment.

She made the comments after the Guardian reported that she plans to change Britain’s debt rules to unlock up to £50bn of additional headroom for investment in infrastructure. That news nudged up UK borrowing costs today:

Reeves has also said that “taxes will need to rise” to meet her first fiscal rule, to balance day-to-day spending with revenues.

Writing in the Financial Times today, Reeves also said her second fiscal rule – to have debt falling in five year’s time – would “ensure we don’t see the falls in public sector investment that were planned under the last government.”

But she hasn’t, yet, confirmed that she will move to use the public sector debt net of financial liabilities (PSNFL) measure.

Elsewhere in Washington DC, the head of the IMF warned that the global economy is facing an “anxious time”.

Kristalina Georgieva said:

For most of the world, a soft landing is in sight.

But people are not feeling good about their economic prospects.

• In the UK, growth in the private sector has slowed to an 11-month low…

• .. and manufacturing confidence has also dipped….

• …at a time when consumer confidence is also weakening…

• …while in Germany, the economic downturn continues.

Newsflash: Rachel Reeves will pledge to reverse huge cuts in public investment in her budget next week after she said that rules limiting her spending power will be overhauled.

Confirming revelations in the Guardian on Wednesday, Reeves said she was not prepared to see public investment fall even further behind the levels seen in other major economies.

She told reporters in Washington DC today:

I can confirm today that will be changing the way that we measure debt in the budget statement next week, but I’ll set out the details of that to Parliament.

Concerns in financial markets that Labour will allow a spending bonanza, mimicking Liz Truss’s infamous mini budget in 2022, were scotched by the chancellor, who said she would maintain strict limits on Whitehall budgets and would not spend all the extra investment funds in her first budget.

Speaking at the IMF’s annual meeting in Washington, she said:

“It’s really important for the sustainability of public finances, that we give confidence to markets that we’re not borrowing to pay for the day-to-day functioning of government.

“And we’ll work with the National Audit Office and the Office for budget responsibility to make sure that all those investments are properly validated, she added.

Bank of England interest rate-setter Catherine Mann has warned that the cooling of price growth in Britain’s services sector still had “a long way to go” for the central bank to hit its 2% inflation target over the medium term.

Mann, one of the hawkish policymakers at the BoE, welcomed a recent fall in inflation in Britain, which dropped to just 1.7% in September.

Speaking on the sidelines of this week’s IFM Annual Meeting, she said:

“Our headline price print ... was lower than projected in the August Monetary Policy Report. Services, which, of course, we have looked at very carefully for persistence, came in under 5% for the first time in a very, very long time.”

But Mann – who opposed August’s interest rate cut – added:

“A little bit of a concern, goods prices are a little bit higher. In order to get to a target consistent (with a) 2% inflation rate, services still have a long way to go.”

Mann also sounded coy about the chances of backing an interest rate cut at the Bank’s next meeting in November, saying:

“If you have structural persistence in the relationship between wages and price formation that lasts, that is persistent and embedded, then it’s premature to start cutting until you purge those behaviours.”

Away from the IMF, Rachel Reeves has written an article in the Financial Times about her fiscal rules – without giving full details of what the new rules will be.

Reeves explains that next week’s budget will “turn the page on years of instability and uncertainty”, and declares that her fiscal rules will be “the rock of stability at the core of my Budget”.

The chancellor writes:

They will set the basis for stable fiscal policy, prudent management of day-to-day spending and responsible investment for growth.

Reeves confirms that the first fiscal rule is the “stability rule”, under which day-to-day spending will be matched by revenues (as was promised in Labour’s manifesto).

And she warns that this rule will “bite hardest” and mean higher taxes, given the state of the public finances and the need to invest in our public services.

She adds:

Alongside tough decisions on spending and welfare, that means taxes will need to rise to ensure this rule is met. I will always protect working people when I make these choices, while taking a balanced approach.

The chancellor adds that this stability rule will also cover the interest on the UK national debt. She pledges that she won’t cut capital budgets to make up for shortfalls in the day-to-day running costs of departments.

But what about the second rule (which is currently to show debt falling as a share of GDP in five year’s time)?

Reeves says her fiscal rule will avoid the cuts to investment planned by her predecessor – an admission that there will be changes.

She says:

My second fiscal rule, the investment rule, will get debt falling as a proportion of our economy. That will make space for increased investment in the fabric of our economy, and ensure we don’t see the falls in public sector investment that were planned under the last government.

So she’s not confirming the Guardian’s report that she will shift to use the Public sector net financial liabilities (PSNFL) measure of debt, which would free up over £50bn of extra borrowing. But nor is she denying it.

The Resolution Foundation’s Cara Pacitti has done a neat thread on X about the fiscal rule changes – including the delightful detail that PSNFL is pronounced “P-snuffle”.

Over in Washington DC, the head of the International Monetary Fund has warned that the global economy is going through “anxious times”.

Kristalina Georgieva is speaking at a press conference now, and acknowledges that while the economic situation has improved, the public are not feeling better.

Georgieva says the global economy has “held up remarkably well”, with inflation continuing to decline, growth still positive, and interest rates starting to fall

Most of the world, a soft landing is in sight.

But people are not feeling good about their economic prospects.

Georgieva explains that everyone she speaks to at the IMF’s Annual Meeting tells me their economy is “good”, but when asked about the mood of their people, the answer is “not so good”.

She says:

Families are still hurting from high prices, and global growth is anaemic.

Georgieva then reminds reporters that the IMF expects global growth of 3.2% this year, but a slowdown to 3.1% in five years – the weakest medium-term forecast in decades.

“Trade is no more a powerful engine of growth. We live in a more fragmented global economy”.

The IMF also expects public debt to surpass $100trn this year, an alltime high, and equivalent to 93% of GDP. By 2030, that figure is expected to reach 100%.

Georgieva declares:

“The global economy is in danger of getting stuck on a low-growth, high-debt path. That means lower incomes and fewer jobs. it also means lower government revenues so less investment to support families and fight long-term challenges like climate change.

These are anxious times.

Here’s our news story on the increase in UK borrowing costs this morning amid expectations that Rachel Reeves will change Britain’s debt rules to unlock up to £50bn of additional headroom for investment in infrastructure.

The chief executive of publisher Bloomsbury has said the business is “fastening their seat belts” and “telling printers to order more paper” ahead of the release of the HBO’s Harry Potter TV series.

Nigel Newton, who founded the company in 1984, said that books in the Harry Potter series were still some of the country’s most popular, with Harry Potter and the Philosopher’s Stone still a bestseller in the UK, despite being released 27 years ago.

Commenting on the new HBO series which is expected to launch in 2026, he said:

“We saw that when the original Warner Brothers films came out, with the release of each movie the book it was based on shot up to the bestseller list.

“With the series there will be multiple episodes per volume, so the seven books will convert to many, many episodes.”

The comments came as Bloomsbury posted its interim results for the six months to 31 August, which saw pre-tax profit hit £22.1m, up 58% on the same period last year.

Much of this growth in sales is the growing popularity of romantasy fiction, with Bloomsbury publishing books from the genre’s most successful author Sarah J Maas.

Crisis-ridden utility firm Thames Water may be thrown a lifebuoy by its creditors to keep it afloat while it restructures its debts.

Reuters are reporting that a group of Thames Water creditors have proposed an alternative liquidity package of up to £3bn to give the company more time to seek a debt restructuring.

Reuters says:

The group, comprising investors with hundreds of millions of pounds worth of so-called B notes, hope their plan will compete with one proposed by a more senior ranking group of A bondholders, two sources said, speaking on condition of anonymity because the matter is private.

The group, whose members include large institutional investors and banks, is offering the company a new debt facility of £1.5bn to £3bn, at an interest rate of 8%, according to the sources.

It is unclear if the company will consider the proposal or how the group will put it together.

Thames, whose credit rating has been slashed deep into junk territory, warned last month that it could run out of cash as soon as December.

It has been asking its lenders to relax its repayment terms, to give more time to tackle its £15bn debts pile.

More gloom!

Sentiment across the UK manufacturing sector has fallen at the fastest pace in two years, according to the CBI’s latest healthcheck.

The CBI’s Business sentiment index has fallen to -24%, down from -9% in July, showing that more companies were pessimistic rather than optimistic about their prospects.

Export optimism for the year ahead also fell, to -16%, from 0% three months ago.

Companies also reported that output fell in the last three months

Total new orders fell in the quarter to October, driven by the sharpest decline in domestic orders since July 2020, as well as lower export orders.

Ben Jones, CBI lead economist, says:

“Sentiment in the manufacturing sector appears to have soured in recent months. Demand has softened both at home and abroad. And although cost pressures have eased, costs are still rising faster than prices, implying a further squeeze on margins.

The recent downturn is expected to bottom out in the coming quarter, which is encouraging. But amid a more uncertain outlook manufacturers have scaled back their plans to invest in buildings, capital equipment, innovation and training.

Jones adds that manufacturers want a confidence-boosting budget that supports business and leads to more investment, concluding:

While possible tax rises remain a concern, firms believe that clarity over future tax plans, measures to enhance productivity, and the country’s net zero trajectory can all help cement the path to long-term growth.”

UK consumer confidence has fallen, driven by gloom among older people and poorer households.

PwC reports that its Consumer Sentiment survey shows a plunge in confidence, to its lowest level this year.

The index has dipped to -8, its lowest point this year and the biggest quarterly drop since Spring 2022 – when Russia’s invasion of Ukraine hit confidence.

Optimism fell particularly sharply in the last quarter among the over-65s, who are now the least optimistic age group for the first time since 2016, and among those in the lowest socioeconomic group.

But, sentiment has increased among younger people, with 18-24 year olds, and 25-34 year olds the only age groups to have seen an improvement in sentiment since July.

PwC says:

The survey reveals a growing polarisation in sentiment between demographic groups, reversing the narrowing trend from earlier in the year

Worryingly, over 70% of respondents are plannng to make short-term spending cuts, noting that household finances have weakened slightly since the summer. That could put festive spending at risk.

PwC explains:

Festive spending is vulnerable to weaker sentiment, with more people now saying they plan to spend less on Christmas presents and celebrations than those who say they’ll spend more.

Newsflash: UK private sector growth has slipped to its lowest in almost a year, as nervous companies brace for next week’s budget.

Data firm S&P Global reports that growth is slowing this month, to the weakest pace since last November.

Companies reported that clients were delaying decision-making, due to heightened economic uncertainty in October – ahead of Rachel Reeves’s first budget, and with conflict in Ukraine and the Middle East continuing.

There was also concerns among clients about near-term domestic economic growth prospects, the report says.

Business confidence weakened, to the lowest since November 2023, leading firms to cut headcounts for the first time this year.

This pulled the Flash UK PMI Composite Output Index, which measures activity across the private sector, down to 51.7 this month, down from September’s 52.6, an 11-month low.

Growth across both manufacturing and services weakened; here’s the details:

• Flash UK Services PMI Business Activity Index at 51.8 (Sep: 52.4), an 11-month low.

• Flash UK Manufacturing Output Index at 50.9 (Sep: 53.6), a 6-month low.

• Flash UK Manufacturing PMI at 50.3 (Sep: 51.5), a 6-month low

Chris Williamson, chief business economist at S&P Global Market Intelligence, says:

“Business activity growth has slumped to its lowest for nearly a year in October as gloomy government rhetoric and uncertainty ahead of the Budget has dampened business confidence and spending. Companies await clarity on government policy, with conflicts in the Middle East and Ukraine, as well as the US elections, adding to the nervousness about the economic outlook.

The early PMI data are indicative of the economy growing at a meagre 0.1% quarterly rate in October, reflecting a broad-based slowing of business activity, spending and demand across both manufacturing and services.

Worryingly, the deterioration in business confidence in the outlook has also prompted companies to reduce headcounts for the first time this year.

The downturn in Germany (see previous post) is holding the eurozone economy back from growth this month.

The HCOB preliminary composite euro zone Purchasing Managers’ Index has inched up to 49.7 for October, up from 49.6 in September, but still below the 50-point mark that separates expansion from contraction.

The report found that Germany and France were again the main sources of weakness, while output increased in the rest of the eurozone.

Dr. Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, says the eurozone is “stuck in a bit of a rut”, adding:

The ongoing slump in manufacturing is being mostly balanced out by small gains in the service sector. At the country level, it can be noted that the deterioration of the situation in France was met by a slight moderation in the decline in Germany.

For now, it is not clear whether we will see a further deterioration or an improvement in the near future.

The economic downturn in Germany is continuing this month, as businesses cut jobs as output declines.

The latest survey of purchasing managers from across Germany’s private sector shows that conditions continue to deteriorate across Europe’s largest economy, led by its ailing manufacturing sector.

Businesses have reported further decreases in output and employment amid a backdrop of weak underlying demand, with workforce numbers falling at the fastest rate for nearly four-and-a-half years.

Data provider S&P Global reports that its HCOB flash Germany Composite PMI Output Index has come in at 48.4 this month.

That’s still below the 50-point mark that shows stagnation, but is slightly better than September’s seven-month low of 47.5 (implying Germany’s economy is still shrinking, but at a slower rate than last month).

Manufacturing production fell again, although the service sector grew a little faster.

Dr. Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, suggests Germany’s economy could grow this quarter, saying:

“The start to the fourth quarter is better than expected. With services growing at a faster pace and manufacturing shrinking not as quickly as in the previous month, growth in the fourth quarter is a distinctive possibility.

Even so, GDP may stay flat for the whole year as forecasted by the International Monetary Fund in its latest projection, after a 0.3% decline in 2023. This underscores the structural weaknesses of the German economy, such as high energy costs, the increased competition from China and the labour market shortages which are all hitting the manufacturing sector hard.

Following in Lloyds Banking Group’s footsteps, Barclays’ CEO has thrown his weight behind Labour’s prospective plans for a tax raising, fiscal-rule shifting budget next week.

Speaking reporters following the release of the bank’s Q3 results (see earlier post), Barclays chief CS Venkatakrishan dodged questions about the potential impact of tax measures including a hike to employers’ national insurance contributions.

However, he made it clear he was backing Labour’s vision, even if it involves tax rises:

I see from the Labor government – and I’ve seen it from before they came into power – a very clear vision about what they want for the UK.

That vision is one of economic growth, and growth that is broad reaching, and growth that covers the important sectors of the economy, such as not just on the high tech side, climate, tech, pharma, but also in addressing the needs of individuals, most important of which is housing right, which takes a bigger part of the consumer budget in the UK than in many other countries in the world.

So all of that requires some amount of investment, and that investment has got to be funded both by some taxation, some borrowing and private sector health. That mix is what the government ultimately has to decide through the budget and other processes.

Barclays, like Lloyds, has been working closely with Labour both in the lead-up and wake of the general election in July.

Both banks were headline sponsors of the government’s international investment summit, which took place on 14 October.

Venkatakrishnan is also part of the government’s National Wealth Fund Taskforce, while its chair Nigel Higgins sat on Labour’s Financial Services Review Advisory Panel earlier this year.

UK government borrowing cost are rising in early trading, as the City reacts to the news that Rachel Reeves will announce changes to Britain’s debt rules at the IMF this week.

It’s not a major move – this is NOT a repeat of the mini-budget crash two autumns ago.

The yield (or interest rate) on UK 10-year government debt has risen by over 3 basis points, from 4.21% last night to 4.24% this morning.

Yields rise when bond prices fall, and reflect the cost of government borrowing.

Significantly, though, the yield on the equivalent US debt (10-year Treasury bills) has dropped by over 3 basis points, to 4.2% from 4.24% yesterday. Germany bond yields are also falling, so the UK is bucking that trend.

Simon French, chief economist of investment bank Panmure Liberum, points out that UK bonds have been trading “differently” since the election.

He says Rachel Reeves wants to avoid bond market losses on Budget day:

This is why the Chancellor is front running a Budget announcement at the IMF this week - she doesn’t want surprises on Budget Day to cause further Gilt market dislocation.

Traders may be concluding that the UK will borrow more if Reeves changes the UK’s debt target, to public sector net financial liabilities (PSNFL); an increase in supply of debt would generally lead to lower prices, and thus higher yields.

However, Andrew Bailey’s comments last night may also be moving the bond market.

Although Bailey said inflation was lower than expected, he also flagged some concerns about the stickinesss of services inflation, saying:

“We’ve got to see services prices inflation come further down. It’s grinding down, but we do have these outstanding questions as to whether we’ve seen some structural change which is going to ... in a sense cause that to become more sticky.”

The odds of a November rate cut have dipped a little, to 86% according to the latest City pricing, down from 89% before bond trading began this morning.

Building materials supplier Travis Perkins has cut its profit forecasts for the second time in three months, as sales continue to slide.

Travis Perkins, which owns the DIY retailer Wickes and Toolstation chains, has reported a 5.7% drop in revenues in the last three months, “driven by the Merchanting segment”. That’s worse than the 4.4% drop it reported in the first half of the year.

New CEO Pete Redfern says Travis Perkins has become “distracted and overly internally focused”, and needs to refocus on “operational execution”.

Ful year adjusted operating profit at the Northampton-based firm is now expected to be around £135m, down from the £150m predicted in early August, and the original forecast of £160m-£180m.

Back in the UK, maverick retail chief Mike Ashley has launched a bid to become chief executive of BooHoo.

Fraser Group, which owns around 27% of Boohoo, has presented its founder Ashley as the solution to the “leadership crisis” at the online clothing retailer.

There is a vacancy to fill – last week, Boohoo announced that CEO John Lyttle was stepping down as it launched a strategic review which could result in the company’s break-up.

Frasers also want to put restructuring expert Mike Lennon on the Boohoo board as a director, at an extraordinary general meeting.

It told the City this morning:

The Board appointments proposed by Frasers are now the only way to set a new course for boohoo’s future. Frasers urges boohoo shareholders to vote in favour of its proposals.

Boohoo says it is “in the process of reviewing the content and validity” of Frasers’ request, and urges shareholders to take no action in the meantime….

A senior IMF official has told the BBC that the UK needs more investment, to catch up with G7 rivals.

Gita Gopinath, the First Deputy Managing Director of the IMF, also warned that the world economy could contract by the size of the combined French and German economies if a ‘broad based trade war’ broke out, the BBC’s Faisal Islam reports:

Gopinath said:

If you have some very serious decoupling and broad scale use of tariffs, you could end up with a loss to world GDP of close to 7%”.

“These are very large numbers, 7% is basically losing the French and German economies.

Policymakers are worried abour the risk of trade conflicts if Donald Trump wins the US presidential election, as he has talked about introducing a 10% tariff on imports into America.

Rachel Reeves will announce at the International Monetary Fund a plan to change Britain’s debt rules that will open the door for the government to spend up to £50bn extra on infrastructure projects.

After weeks of speculation, the chancellor will confirm at the fund’s annual meetings in Washington today that next week’s budget will include a new method for assessing the UK’s debt position – a move that will permit the Treasury to borrow more for long-term capital investment.

The change to the debt rule will be welcomed by the IMF, which says spending on UK infrastructure projects should be ringfenced as the government seeks to repair the damage to the public finances caused by the pandemic and the cost of living crisis.

Reeves will not specify while in Washington which of the various debt measures under consideration has been chosen, but the Guardian has been told by a senior government source that she will target public sector net financial liabilities (PSNFL).

This yardstick – which will replace public sector net debt – will take into account all the government’s financial assets and liabilities, including student loans and equity stakes in private companies, as well as funded pension schemes.

This would give the chancellor room to increase borrowing for investment in long-term infrastructure.

More here:

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

The governor of the Bank of England has declared that UK inflation is cooling more rapidly than expected, as policymakers gather in Washington DC to discuss the state of the global economy.

Andrew Bailey told an event organised by the Institute of International Finance event last night that prices were rising slower than he would have expected.

Bailey explained:

“If you’d ask me what inflation was going to be now, it would have been a bit higher than it is today.”

UK inflation hit a three-and-a-half year low of 1.7% in September, below the Bank’s 2% target.

Bailey’s comments appear to be another hint that the Bank of England could lower interest rates at its meeting next month.

This morning, the money markets predict that a November rate cut, from 5% to 4.75%, is an 89% chance.

Those odds jumped at the start of this month, after Bailey told the Guardian that the Bank could become a “bit more aggressive” in cutting interest rates if inflation continues to cool.

Bailey’s told the IIF last night that “disinflation” (an easing in the rate of inflation) was happening faster than expected, saying:

“Disinflation is happening I think faster than we expected it to, but we have still genuine question marks about whether there have been some structural changes in the economy.”

Bailey is in Washington DC for the annual meetings of the International Monetary Fund (IMF) and the World Bank Group.

UK chancellor Rachel Reeves has headed there too. Before setting off yesterday, Reeves declared she would be presenting next week’s budget as a economic ‘reset’ for the UK:

“A Britain built on the rock of economic stability is a Britain that is a strong and credible international partner.

“I’ll be in Washington to tell the world that our upcoming budget will be a reset for our economy as we invest in the foundations of future growth.

“It’s from this solid base that we will be able to best represent British interests and show leadership on the major issues like the conflicts in the Middle East and Ukraine.”

The agenda

• 9am BST: Eurozone composite PMI surveys for October

• 9.30am BST: UK composite PMI surveys for October

• 11am BST: CBI’s industrial trends survey of UK manufacturing

• 1pm BST: IMF chief Kristalina Georgieva gives main press conference