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The UK economy is tipped for a surprisingly strong third quarter, despite hand-wringing over the upcoming budget.
Pound sterling could be poised for a rebound after stronger-than-expected UK PMI data challenged investor pessimism about the economy’s trajectory ahead of the November Budget.
Sterling has weakened through much of the past month as markets priced in slower growth and fiscal tightening risks, but the latest S&P Global surveys suggest the economy’s momentum is more resilient than feared.
October’s composite PMI rose to 52.2 from 50.1 in September, beating both consensus and the flash estimate of 51.1. Readings above 50 indicate expansion, and the data imply the UK’s private sector is regaining traction after a subdued summer.
The services sector – which dominates UK output – saw its PMI climb to 52.3 from 50.8, again comfortably beating forecasts. S&P Global said “business activity expanded for the sixth consecutive month in October, with growth momentum strengthening considerably since September, helped by improved demand conditions.”
Economists at WPI Strategy say the PMI rebound supports a stronger near-term outlook for growth and could mark a turning point in sentiment. “The latest surveys reinforce our above-consensus view on the economy’s near-term growth prospects. PMIs tend to exaggerate weakness when uncertainty is high,” said Martin Beck, Chief Economist at WPI Strategy.
Beck added that speculation over possible tax rises in the upcoming Budget has kept services sentiment fragile, suggesting the October bounce may understate the underlying recovery. WPI Strategy expects GDP to expand 0.4% in Q3 and 1.5% in 2025, with growth accelerating modestly in 2026.
This would confound the consensus expectation for a lower pace of growth.
The survey also indicated that manufacturers delivered a stronger performance, while domestic demand remained firm despite elevated uncertainty and delayed corporate spending decisions.
Above: GBP/EUR has come under sustained pressure of late.
Importantly, the survey provided evidence that 2025’s labour market slowdown was starting to fade, which would limit the fall in wages and inflation going forward.
This would prevent the Bank of England from cutting interest rates too far or too fast. Given the pound has fallen as markets have raised bets for rate cuts, such an observation is understandably supportive of GBP’s outlook.
“Inflation will struggle to keep slowing if the labour market stabilises as it appears to be doing,” says Robert Wood, Chief UK Economist at Pantheon Macroeconomics.
For investors, the surprise uptick in activity data undermines the gloom that has driven sterling lower in recent weeks. If the PMI signals are borne out in hard data, they could force a reassessment of the UK’s growth story – and by extension, its currency prospects.
The pound’s recent weakness may therefore prove temporary, with the latest business surveys hinting that the UK economy is on a steadier footing than many feared.
“The latest GBP weakness is driven by market fears about the growth-negative impact of the upcoming fiscal austerity measures that should further force the BoE to turn more dovish,” says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole. “We have recently downgraded our GBP outlook to bring our near-term forecasts closer to the current market levels for the GBP. We have further recognised, however, that a lot of negatives are in the price of the currency and would therefore expect it to regain some ground.”
“I struggle with being short GBP here and now. In fact given levels in cable I have dabbled in some tactical longs here,” says a trader at JP Morgan.
