Chancellor Rachel Reeves got here to workplace in July pledging to strengthen progress the primary mission of the brand new Labour authorities. Official figures on Friday underlined how far she is from attaining this ambition.
After gaining momentum since 2023, output slipped again in September and October. The figures affirm that companies and households shied away from spending within the lead-up to a Finances that Prime Minister Sir Keir Starmer warned can be painful.
The most recent figures are “a major disappointment”, in line with Allan Monks at JPMorgan. However what are the important thing drivers behind the UK’s weak financial efficiency?
Pre-Finances anxiousness
Reeves and Starmer made it abundantly clear their first Finances can be a troublesome one, warning of the necessity to right a £22bn in-year overspend inherited from Rishi Sunak’s authorities and to lift funds to repair struggling public providers.
The prolonged interval of uncertainty earlier than October’s Finances damped confidence as companies and households awaited readability on tax and spending measures.
“Development suffered within the run-up to the Finances, maybe as worries about greater taxation precipitated households and corporations to postpone spending choices,” stated Andrew Wishart, economist at Capital Economics.
The UK’s poor efficiency within the second half of the 12 months contrasted with early 2024, when the economic system rebounded with 0.7 per cent progress within the first quarter, following a technical recession on the finish of final 12 months.
The fourth quarter of the 12 months may additionally show weak, as companies come to phrases with the upper tax burden introduced on the Finances, added Yael Selfin, chief economist on the consultancy KPMG UK.
Nevertheless, some economists play down the argument that the October slowdown was primarily pushed by pre-Finances jitters.
Chris Hare, economist at HSBC, stated the UK could also be topic to a low progress “velocity restrict” due to weak productiveness. Annual UK productiveness progress has averaged solely 0.5 per cent over the previous 15 years, he famous. “If that productiveness situation doesn’t get higher, the economic system will solely have the ability to develop so quick.”
Financial institution of England warning
The Financial institution of England has trimmed rates of interest twice this 12 months, bringing them to 4.75 per cent, however the burden of excessive borrowing prices is continuous to take its toll on the economic system.
Current evaluation from the BoE confirmed that about half of mortgage holders, or 4.4mn households, should refinance their residence loans on to greater charges as soon as their fastened offers expire within the subsequent three years.
The BoE is predicted to go away rates of interest unchanged subsequent week, earlier than trimming them once more within the new 12 months.
It has been reluctant to chop extra aggressively given persistently excessive providers inflation. Economists polled by Reuters anticipate official figures subsequent week to indicate providers value progress of 5.1 per cent in November, in contrast with 5 per cent in October.
Uncertainty over how the Finances enhance in employer nationwide insurance coverage contributions will play out can also be hampering BoE decision-making.
A survey revealed on Friday by the BoE confirmed that buyers now anticipate inflation of three per cent within the 12 months forward, up from 2.7 per cent when the query was final requested in August. This can add to the financial institution’s reluctance to hurry by means of additional fee cuts.
Some economists argue that indicators of a weakening jobs market imply the BoE just isn’t being aggressive sufficient in decreasing charges.
“A mixture of lingering inflationary aversion, alongside the particular sample across the providers inflation knowledge, add to the danger coverage stays cautious for longer than it ought to,” stated Ben Nabarro, UK economist at Citigroup, in a word this week.
Poor client confidence
Whereas inflation has subsided since highs exceeding 11 per cent in 2022 and actual incomes have been rising for greater than a 12 months, issues about the price of residing are nonetheless restraining progress.
Family financial savings relative to disposable revenue have elevated this 12 months within the UK and the Eurozone, underscoring an image of cautious customers.
“There’s a threat that family financial savings charges will proceed to rise, which may act as a major drag on progress,” HSBC’s Hare stated.
Output in consumer-facing industries, akin to bars and eating places, was nonetheless 5.3 per cent beneath its pre-pandemic ranges in October, reflecting decrease spending as family funds have been hit by elevated costs and borrowing prices.
European malaise
The poor well being of the broader European economic system can also be holding the UK again, given the EU is the nation’s greatest export market.
The Eurozone grew by simply 0.4 per cent within the third quarter, up from 0.2 per cent within the earlier three months.
European economies are lagging behind the US, the place the economic system is 11.4 per cent above its pre-pandemic stage, in contrast with 3 per cent within the UK and 4.6 per cent within the Eurozone.
The danger of worsening commerce tensions within the new 12 months, when Donald Trump takes energy within the US, may act as an added drag on European economies.
“A weakening export local weather amid rising world coverage uncertainties and declining enterprise confidence, exacerbated by the influence of just lately introduced Finances measures, raises issues about sustaining the expansion momentum,” stated Hailey Low, economist on the Nationwide Institute of Financial and Social Analysis.
Murky prospects
October’s weak GDP figures elevate questions on progress forecasts for subsequent 12 months. In October, the Workplace for Finances Accountability forecast progress of two per cent in 2025, up from 1.1 per cent this 12 months.
Analysts at the moment are revising down their expectations. Economists polled by Consensus Economics on December 9 anticipated progress of 0.9 per cent this 12 months and 1.25 per cent in 2025. Following Friday’s knowledge, Capital Economics downgraded its 2025 progress forecast to 1.4 per cent from 1.6 per cent.
Even when that gloomier prognosis bears out, it nonetheless means subsequent 12 months can be modestly stronger than 2024, nonetheless. That’s partly as a result of the federal government’s Finances boosted borrowing and spending, which ought to assist financial exercise.
“The outlook for the UK economic system subsequent 12 months, relative to the G7, stays brighter,” stated Barret Kupelian, chief economist at PwC UK.
