Labour’s push for growth is affected by the recent fall in UK results

Chancellor Rachel Reeves came to office in July promising to significantly expand the first job of the new Labor government. Government figures on Friday showed how far they are from meeting their targets.

After increasing from 2023, the output he slipped back in September and October. These figures confirm that businesses and households refused to spend money in the preparation of the Prime Minister’s Budget Sir Keir Starmer being warned will be painful.

The latest figures are “very disappointing”, according to Allan Monks at JPMorgan. But what are the causes of the UK’s economic weakness?

Pre-Budget Concern

Reeves and Starmer have made it clear that their first Budget will be tough, warning of the need to fix the £22bn a year budget taken from Rishi Sunak’s government and find funding for public services.

Long-term uncertainty ahead of the October Budget dampened confidence as businesses and households waited for clarity on tax and spending.

“Growth weakened in the run-up to the Budget, perhaps as concerns about higher taxes caused households and businesses to delay spending decisions,” said Andrew Wishart, chief economist at Capital Economics.

The UK’s lackluster performance in the second half of the year contrasts with early 2024, when the economy picked up and grew by 0.7 percent in the first quarter, following a technical slump at the end of last year.

The fourth quarter of the year can also be weak, since business deals with high tax burden announced at the Budget, added Yael Selfin, senior economist at KPMG UK consultancy.

However, some economists dispute claims that October’s decline was driven primarily by the Budget crisis.

Chris Hare, chief economist at HSBC, said the UK could have a slower “pace” due to weak yields. Annual growth in the UK has been around 0.5 per cent over the past 15 years, he said. “If the productivity problem doesn’t improve, the economy can grow very quickly.”

Bank of England warning

The Bank of England has cut interest rates twice this year, to 4.75 percent, but the burden of cheap borrowing continues to weigh on the economy.

Recent research from the BoE showed that almost half of borrowers, or 4.4mn households, will have to refinance their mortgages to higher rates when their fixed-rate contracts expire over the next three years.

The BoE is expected to leave interest rates unchanged next week, before cutting them further in the new year.

It has been reluctant to cut too aggressively to be given continuously to the chief job growth. Economists polled by Reuters expect official figures next week to show inflation of 5.1 percent in November, compared with 5 percent in October.

Uncertainty over the impact of the Budget’s increase in employers’ national insurance contributions also hampers BoE decision-making.

A survey published on Friday by the BoE showed that consumers now expect inflation to fall by 3 percent in the coming year, up from 2.7 percent when the question was last asked in August. This will increase the bank’s reluctance to rush to cut rates again.

Some economists say that the signs of a weakening the labor market means the BoE is not aggressive enough in cutting rates.

“The combination of inflation, in line with the real policy of job growth, in addition to the risk policy remains cautious for longer than it should be,” said Ben Nabarro, UK economist at Citigroup, in a statement this week.

Consumer distrust

While inflation has fallen since then higher than 11 percent in 2022 and real income has been growing for more than a year, cost of living concerns are holding back growth.

Household savings in relation to losses have increased this year in the UK and the Eurozone, underscoring the image of cautious consumers.

“There is a risk that housing prices will continue to rise, which could be very attractive,” HSBC’s Hare said.

Output in consumer-oriented industries, such as bars and restaurants, was still 5.3 percent below the pre-epidemic level in October, reflecting a decline in household income that was hit by higher prices and borrowing.

European malaise

The poor economic health of Europe is also holding the UK back, as the EU is its biggest export market.

The eurozone grew by just 0.4 percent in the third quarter, from 0.2 percent in the previous three months.

The European economy is lagging behind the US, where the economy is 11.4 percent higher than before the pandemic, compared to 3 percent in the UK and 4.6 percent in the Eurozone.

The risk of increasing trade tensions in the new year, when Donald Trump takes power in the US, could be an additional drag on the European economy.

“The slowdown in exports amid rising global policy uncertainty and declining business confidence, exacerbated by the recently announced Budget measures, raises concerns about boosting growth,” said Hailey Low, an economist at the National Institute of Economic Research. and Social Research.

Dark expectations

Weak GDP numbers for October raise questions about growth forecasts for next year. In October, the Office for Budget Responsibility forecast growth of 2 percent in 2025, up from 1.1 percent this year.

Experts are now revising their expectations. Economists polled by Consensus Economics on December 9 expected growth of 0.9% this year and 1.25% in 2025. After Friday’s data, Capital Economics lowered its 2025 forecast to 1.4 percent from 1.6 percent.

Even if it ends, it will mean that next year will be stronger than 2024. This is because the government Budget encouraged borrowing and spending that should support economic activities.

“The outlook for the UK economy next year, compared to the G7, remains bright,” said Barret Kupelian, chief economist at PwC UK.