Pound falls as winter chill hits manufacturing sector following Labor Party pessimism

The pound hit its lowest level against the US dollar in almost nine months yesterday as figures showed a “winter chill” descending on UK manufacturers after the Labor budget.

Sterling fell more than a cent to below $1.24, its lowest level since April 23, as Purchasing Managers’ Index (PMI) data showed the sector contracting at its fastest pace in 11 months.

Confidence has fallen to its worst level in two years following Rachel Reeves’ bleak rhetoric on the economy and her £25bn raid on employers’ National Insurance (NI) contributions.

Businesses are now scrambling to reduce staff costs as they prepare for the NI increase – which significantly increases the cost of hiring staff – in April.

The December PMI reading for the sector fell to an 11-month low of 47, down from 48 in November, on a scale where 50 separates growth from contraction.

Rob Dobson, director of global market intelligence at S&P, which compiled the report, said companies were facing an “increasingly gloomy backdrop” and higher costs for UK factories and their customers.

Smaller businesses have been “especially hard hit during the last crisis,” he added.

“This is causing a winter chill in the labor market.” The survey showed companies cutting staff levels at the fastest rate since February.

Dobson said: “Some are acting now to restructure operations in light of increases in employers’ National Insurance and minimum wage levels in 2025.”

He said global market conditions were also taking their toll, as exports were hit by lower demand from Europe, Asia and the United States.

It is the latest grim economic data for the UK after the Labor Party took power.

The latest official figures show Britain achieved zero growth in the third quarter of 2024. And the Bank of England has forecast another period of stagnation for the fourth quarter.

Lee Hardman, currency analyst at MUFG, said that if there were further signs of weakening “and the Bank started making noise about potentially being more active in terms of cutting rates in response”, that could increase pressure on the pound.