Blink and you would have missed any signs of UK economic growth in recent months. After flatlining in June and July, growth picked up slightly in August. But the latest UK GDP figures from the Office for National Statistics (ONS) show the economy shrank by 0.1% on a monthly basis in September, and only grew by 0.1% in the third quarter.
It will come as bad news to the government, opening it up to further scrutiny after the Autumn Budget. Labour has declared economic growth to be a “national mission”, however chancellor Rachel Reeves has run into criticism from businesses recently after using her fiscal statement to announce a hike to employer National Insurance contributions. Many businesses argue this will hamper growth going forward.
The three-month figure is the most important metric to watch, as the ONS warns that monthly growth rates can be volatile. The main contributor to growth in the third quarter was services output – the largest segment of the UK economy – which rose by 0.1%. There was also a 0.8% increase in construction output. Meanwhile, production output fell by 0.2%.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Growth in the first two quarters of the year (0.7% and 0.5% respectively) was significantly higher than in the third quarter. Reeves has said she is “not satisfied” with the latest findings.
“After bouncing back from recession earlier this year, Britain’s recovery is already running out of steam,” says Simon Pittaway, senior economist at the Resolution Foundation, an independent think tank. “The UK has fallen below the US at the top of the G7 GDP growth leaderboard, with growth slowing, wage rises shrinking and employment starting to fall.”
He adds: “The UK has been a GDP rollercoaster over the past 12 months, but its medium-term performance has been staid and stagnant. Over the past five years, the economy has shrunk by 0.7 per cent once you account for population growth.”
Did the Budget weigh on sentiment?
After some brief optimism in the wake of Labour’s election win, the mood quickly became gloomy as talk turned to the “black hole” in the public finances and a tax-raising Autumn Budget. Businesses reported a slowdown in decision-making against the uncertain backdrop and experts suggest this could have impacted the GDP figures released today.
Ben Jones, lead economist at the Confederation of British Industry, says he still expects the economy to return to a path of modest growth in the year ahead. However the downside risks have increased.
“The Budget has set off warning lights for business,” he explains. “The hike in National Insurance contributions alongside other increases to employers’ cost base will add to the burden on business. And it is expected to trigger a more cautious approach to pay, hiring and investment as companies work through what it means for their own budgets.”
Despite this, Reeves unveiled some more positive news for businesses in her Mansion House speech on 14 November, outlining plans to increase private investment and reform the UK economy. A key part of this will involve pension reform, pooling smaller pots into pension megafunds to improve the efficiency of the market and funnel investment into things like infrastructure projects.
“Delivered well, this could give rise to higher returns to pension savers and help grow the UK economy at the same time, which would be good for everyone,” says Jamie Jenkins, director of policy at financial services company Royal London.
Will the Bank of England cut interest rates in December?
Despite today’s limp GDP figures, an interest rate cut looks unlikely at the Monetary Policy Committee (MPC) meeting in December. In the latest poll from news agency Reuters, almost two-thirds of economists (46 out of 72) said they expect rates to be kept on hold.
“Rate setters will likely be concerned enough over inflation risks from the Budget and growing global headwinds to resist signing off back-to-back interest rate cuts,” says Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales.
The hike to employer National Insurance contributions could contribute to rising prices, if businesses pass the costs on to consumers. The National Living Wage is also set to rise 6.7% from April – good news for employees but another cost for employers.
Donald Trump’s election win across the pond has also added to inflation nervousness. There are fears his isolationist policies could disrupt global trade, proving costly to businesses and consumers.
Analysis from the National Institute of Economic and Social Research (NIESR) suggests UK inflation could be 3-4 points higher over the next two years if Trump imposes the tariffs that have been threatened.
On top of this, the rate of inflation is expected to pick up in the next CPI report. Average household energy prices surged by 10% at the start of October. “When measured against a fall a year earlier, it’s going to look particularly grim,” says Sarah Coles, head of personal finance at Hargreaves Lansdown.
-
Bitcoin price one of the most-asked questions on Alexa - here's how to buy the cryptocurrencyAccording to figures from Amazon, which cover September 2023 to November 2024, pop star Taylor Swift and Bitcoin were named among the most popular Alexa queries of 2024
-
Investing for children this Christmas – five ideasIt might not come with a shiny ribbon, but an investment fund could be the gift that keeps on giving. We share five ideas if you are investing for children this Christmas.
