British business activity weakened in September while price pressures intensified, adding to the economic challenge facing Chancellor John Healey ahead of next month’s Budget.

The S&P Global UK Services Purchasing Managers’ Index fell to 51.7 from 52.5 in August, its lowest level in three months and below the 52.0 forecast in a Reuters poll of economists. Although a reading above 50 indicates continued expansion, the figures point to an economy growing only marginally.

Growth slows as costs rise

S&P Global said the survey was consistent with quarterly economic growth of about 0.1%, substantially below the 0.4% expansion recorded in the second quarter. Manufacturing activity improved modestly, but the broader composite PMI, which combines services and manufacturing, also declined to 51.7.

Businesses reported a difficult combination of weak demand, subdued confidence and higher costs. Employment conditions also remained soft, limiting the strength of the recovery and increasing pressure on policymakers to support growth without worsening inflation.

Budget challenge

The figures arrive as the government prepares for its October Budget. Slower activity could reduce tax receipts and make it harder for the Treasury to meet its fiscal objectives, while persistent inflation restricts the room for measures designed to stimulate demand.

Higher borrowing costs add to the pressure on households and companies. Businesses facing more expensive finance may defer investment, while consumers remain cautious about discretionary spending.

The data also complicate the Bank of England’s policy outlook. A weaker economy could argue for lower interest rates, but intensifying cost pressures may encourage policymakers to keep monetary conditions restrictive for longer.

Services remain the key test

Services account for the largest share of UK economic output, making the sector’s slowdown particularly significant. The September survey suggests that the economy entered the final quarter with limited momentum, even as manufacturing showed some improvement.

Consumer confidence has improved for a third consecutive month, according to GfK, but the survey continued to show caution among households. That combination—improving sentiment but restrained spending—will be closely watched by retailers and other consumer-facing businesses.

Investors are also monitoring the impact of energy-market uncertainty and government borrowing costs on companies and public finances. The FTSE 100 closed at 10,695 on Friday, up 0.14%, with gains in banks and mining stocks offsetting weakness among oil majors.