Reeves held responsible as marginal growth expected
Chancellor Rachel Reeves has had to watch the UK economy trudge along since she took up residence at 11 Downing Street.
But even more bad news has been forecast to come before another lot this summer, and potentially no better news later this year.
This Friday, the Office for National Statistics (ONS) is poised to reveal whether the UK economy grew in February after January saw a contraction to GDP of 0.1 per cent.
The ONS release will be the penultimate set of data suggesting how the economy was bracing itself for the Reeves’ national insurance tax hikes in April and it will be a test for whether the Chancellor has truly delivered high growth at a “faster” pace than her predecessor Jeremy Hunt.
A Bloomberg poll of economists said the month-on-month figure for UK growth will be 0.1 per cent.
Industrial production and manufacturing are expected to rebound after falls of one per cent fall the month before. Treasury officials are likely to be preparing themselves to be disappointed.
City analysts, for one, have become used to getting let down in recent months. In January, growth of 0.1 per cent was pencilled in. A contraction surprised economists. The same happened for data in October.
The small rise in February is expected to be driven by the services sector after brighter purchasing managers’ index (PMI) data, as compiled by S&P Global.
Deutsche Bank’s Sanjay Raja believes there was a contraction in transport activity, while Pantheon Macroeconomics’ Rob Wood and Elliott Jordan-Doak predict that a fall in industrial production will hold UK growth back.
The cause of this stagnation may largely be put down to a plague of bad vibes: adjustments to cope with looming tax rises, worries about a trade war and general fear of what Reeves next has in store.
“We are suffering just now from a bad attack of economic pessimism,” Kallum Pickering, an economist at Peel Hunt, said.
“It is common to hear people say that the epoch of enormous economic progress which characterised the nineteenth century is over; that the rapid improvement in the standard of life is now going to slow down –at any rate in Great Britain; that a decline in prosperity is more likely than an improvement in the decade which lies ahead of us.”
“Although headline confidence has rebounded slightly since the budget, it remains weak along with consumer expectations for the coming year,” he added.
In most of those confidence surveys since the Autumn Budget, one policy has been consistently pointed to as the bane of firms across virtually all UK sectors.
Reeves’ £25bn national insurance tax hikes have been described as “unpalatable” by the British Chambers of Commerce (BCC)’s Shevaun Haviland, an “anchor” for low confidence by the Recruitment and Employment Confederation (REC)’s Neil Carberry and a “burden” by Confederation of Business Industry (CBI) economist Ben Jones.
S&P Global, whose PMIs inform economists as they make GDP data predictions each month, have cited firms’ “restructuring” efforts to keep the incoming costs of greater national insurance tax contributions down.
The impact on employment is of particular concern. The Office for Budget Responsibility (OBR), the fiscal watchdog, revised its unemployment rate to 4.5 per cent this year from a previous forecast of 4.0 per cent.
The national insurance tax hikes also contributed to the Bank of England’s decision to slash its UK growth forecast to 0.75 per cent in an interest rate decision in February while the likes of the OBR and City banks have rushed to follow the Bank’s lead in the two months since.
GDP data for April, to be released in two months, may show just how well UK firms prepared for higher tax bills.
But new headwinds from President Trump’s tariff regime are unlikely to improve the overall economic outlook.
Most forecasters now do not expect UK growth to surge above 0.5 per cent for any quarter of this year.
Capital Economics are especially downbeat. Its economists predict that there will be a minimal expansion of 0.2 per cent in each of the first two quarters of the year and 0.3 per cent growth for the three quarters thereafter.
“Bigger drags from the rises in taxes for UK firms and the uncertain global backdrop mean the economy will be weaker for longer.”
City analysts will be sitting tight until the Spending Review, when a range of public spending proposals will be put forward. Many will be hoping the government can find cuts in order for fears of further tax rises to be squashed.