Rachel Reeves made “tough choices” on taxes in her budget
BEN BIRCHALL/PA
The UK’s “gangbusters” growth performance at the start of the year has become a distant memory for a new government grasping for new growth levers.
The economy has now only grown in two of the past six months and almost ground to a halt in the third quarter, with a tepid expansion of 0.1 per cent. The first estimate from the Office for National Statistics is lower than the modest 0.2 per cent expected by the Bank of England and most economists who all had forecast a drift lower from the impressive 0.7 per cent and 0.5 per cent figures recorded in the first and second quarter respectively.
The third-quarter data means the UK has dropped from being the fastest-growing G7 economy in the first three months of the year to the second lowest behind Italy. Labour has said it is targeting the fastest growth in the bloc over the course of the parliament — an aim that is subject to extreme volatility as it largely relies on beating out the world’s strongest and largest economy, the United States.
In September, the economy contracted by 0.1 per cent, a figure that may have been driven lower by uncertainty over October’s budget. A raft of business surveys had shown respondents were holding back on spending decisions and investment until they knew more about the “tough choices” to be made on taxes by Rachel Reeves, the chancellor. The Office for National Statistics, however, said companies provided no feedback on the budget when the statistics body conducted its GDP survey.
Budget fears seem to have had little lasting impact on households however, with consumer spending one of the bright spots in the economy in recent months. Expenditure rose by 0.5 per cent between the second and third quarters and consumer-facing sectors also grew by 0.4 per cent in September, despite the broader downturn caused by the IT and manufacturing industries.
In better news for Labour, the present economic weakness is unlikely to morph into a recession as growth is on course to steadily pick up in the final three months of the year. Recent interest rate cuts will help support households and the government’s front-loaded spending plans for the NHS and other parts of the public sector will begin kicking in before the end of the year.
The danger for the government is that its promised growth leap may be delayed if its ambitious stimulus measures are outweighed by the negative impact of the rise in employers’ national insurance, which has been dubbed a tax on jobs. The British Chambers of Commerce, an industry lobbying group, said its “early feedback from businesses suggest many will not be able to stomach the raft of new costs”.
There are already signs of a prolonged slowdown in hiring across the economy this year, a trend that could result in the loss of 100,000 existing and future jobs, according to estimates from Deutsche Bank.
Reeves could get an unexpected boost from the Bank, if it chooses to react to the slowing economy with another interest rate cut by the end of the year. For now, economists expect the monetary policy committee to look past the figures and stick to their promise of gradual monetary loosening next year.