Chancellor Rachel Reeves got here to workplace in July pledging to strengthen development the primary mission of the brand new Labour authorities. Official figures on Friday underlined how far she is from reaching 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 could be painful.
The newest figures are “a significant disappointment”, in keeping 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 could be a tricky one, warning of the necessity to appropriate a £22bn in-year overspend inherited from Rishi Sunak’s authorities and to boost funds to repair struggling public companies.
The prolonged interval of uncertainty earlier than October’s Finances damped confidence as companies and households awaited readability on tax and spending measures.
“Growth suffered in the run-up to the Budget, perhaps as worries about higher taxation caused households and firms to postpone spending decisions,” mentioned 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 development within the first quarter, following a technical recession on the finish of final 12 months.
The fourth quarter of the 12 months might additionally show weak, as companies come to phrases with the greater 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, mentioned the UK could also be topic to a low development “speed limit” due to weak productiveness. Annual UK productiveness development has averaged solely 0.5 per cent over the previous 15 years, he famous. “If that productivity issue does not get better, the economy will only be able to grow so fast.”
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.
Latest evaluation from the BoE confirmed that about half of mortgage holders, or 4.4mn households, must refinance their dwelling loans on to greater charges as soon as their mounted offers expire within the subsequent three years.
The BoE is anticipated 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 companies inflation. Economists polled by Reuters anticipate official figures subsequent week to indicate companies value development of 5.1 per cent in November, in contrast with 5 per cent in October.
Uncertainty over how the Finances improve in employer nationwide insurance coverage contributions will play out can also be hampering BoE decision-making.
A survey printed on Friday by the BoE confirmed that customers 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 isn’t being aggressive sufficient in reducing charges.
“A combination of lingering inflationary aversion, alongside the specific pattern around the services inflation data, add to the risk policy remains cautious for longer than it should,” mentioned Ben Nabarro, UK economist at Citigroup, in a notice 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, considerations about the price of residing are nonetheless restraining development.
Family financial savings relative to disposable earnings have elevated this 12 months within the UK and the Eurozone, underscoring an image of cautious customers.
“There’s a risk that household savings rates will continue to rise, which could act as a significant drag on growth,” HSBC’s Hare mentioned.
Output in consumer-facing industries, reminiscent of bars and eating places, was nonetheless 5.3 per cent beneath its pre-pandemic ranges in October, reflecting decrease spending as family funds had 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 largest 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 chance of worsening commerce tensions within the new 12 months, when Donald Trump takes energy within the US, might act as an added drag on European economies.
“A weakening export climate amid rising global policy uncertainties and declining business confidence, exacerbated by the impact of recently announced Budget measures, raises concerns about sustaining the growth momentum,” mentioned Hailey Low, economist on the Nationwide Institute of Financial and Social Analysis.
Murky prospects
October’s weak GDP figures increase questions on development forecasts for subsequent 12 months. In October, the Workplace for Finances Accountability forecast development 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 development of 0.9 per cent this 12 months and 1.25 per cent in 2025. Following Friday’s information, Capital Economics downgraded its 2025 development forecast to 1.4 per cent from 1.6 per cent.
Even when that gloomier prognosis bears out, it nonetheless means subsequent 12 months will likely be modestly stronger than 2024, nevertheless. 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 economy next year, relative to the G7, remains brighter,” mentioned Barret Kupelian, chief economist at PwC UK.
