Chancellor Rachel Reeves took office in July vowing to make strong growth the number one mission of the new Labor government. Official figures on Friday showed how far it is from achieving this ambition.
After gaining momentum since 2023, production I blinked again In September and October. The figures confirm that companies and families refrained from spending in the period leading up to the Prime Minister's budget Sir Keir Starmer Beware it will be painful.
The latest figures are a “huge disappointment”, according to Alan Monks, of JP Morgan. But what are the main drivers behind the UK's poor economic performance?
Pre-budget anxiety
Reeves and Starmer have made it abundantly clear that their first Budget will be a tough one, warning of the need to correct £22bn of overspending over the year inherited from Rishi Sunak's government and raise money to fix ailing public services.
The long period of uncertainty ahead of the October Budget dented confidence as businesses and households waited for clarity on tax and spending measures.
“Growth has suffered in the run-up to the Budget, perhaps due to concerns about higher taxes causing households and businesses to postpone spending decisions,” said Andrew Wishart, economist at Capital Economics.
The UK's weak performance in the second half of the year contrasts with early 2024, when the economy rebounded with 0.7 per cent growth in the first quarter, following a technical recession at the end of last year.
The fourth quarter of the year could also be weak, as companies come to terms with the crisis High tax burden It was announced in the budget, added Yael Selvin, chief economist at consultancy KPMG in the UK.
However, some economists are downplaying the argument that the October slowdown was primarily driven by pre-budget jitters.
Chris Hare, an economist at HSBC, said the UK may be subject to a lower “speed limit” to growth due to weak productivity. He pointed out that annual productivity growth in the UK has averaged just 0.5 per cent over the past 15 years. “If productivity does not improve, the economy will only be able to grow so fast.”
The Bank of England warned
The Bank of England has cut interest rates twice this year, to 4.75 per cent, but the burden of high borrowing costs continues to negatively impact the economy.
Recent analysis by the Bank of England showed that around half of mortgage holders, or 4.4 million households, will have to refinance their mortgages at higher rates once their fixed deals expire in the next three years.
The Bank of England is expected to leave interest rates unchanged next week, before cutting them again In the new year.
He was hesitant to cut too aggressively given the ongoing rally Services inflation. Economists polled by Reuters expect official figures next week to show growth in service prices by 5.1 percent in November, compared to 5 percent in October.
Uncertainty over how the budget will increase employers' National Insurance contributions is also hampering decision-making at the Bank of England.
A survey published by the Bank of England on Friday showed that consumers now expect inflation of 3 per cent next year, up from 2.7 per cent when the question was last asked in August. This will increase the bank's reluctance to rush further interest rate cuts.
Some economists argue that signs of A Weakening the labor market This means that the Bank of England is not aggressive enough in cutting interest rates.
“A combination of persistent inflation aversion, coupled with the pattern identified around services inflation data, adds to the risk that policy remains dovish for too long,” Ben Nabarro, a British economist at Citigroup, said in a note this week.
Weak consumer confidence
While inflation has declined since then Higher than 11 percent In 2022, with real income growing for more than a year, concerns about the cost of living continue to constrain growth.
Household savings compared to disposable income rose this year in the UK and the eurozone, underscoring a picture of cautious consumers.
“There is a risk that household savings rates will continue to rise, which could be a major drag on growth,” HSBC's Hare said.
Output in consumer-facing industries, such as bars and restaurants, was still 5.3 percent below pre-pandemic levels in October, reflecting lower spending as household finances were hit by rising prices and borrowing costs.
European distress
The poor health of the broader European economy is also holding back the UK's progress, given that the EU is the country's largest export market.
The euro zone grew by just 0.4 percent in the third quarter, compared to 0.2 percent in the previous three months.
European economies lag behind the United States, with the economy above the pre-pandemic level by 11.4 percent, compared to 3 percent in the United Kingdom and 4.6 percent in the eurozone.
The risk of trade tensions worsening in the new year, when Donald Trump takes power in the United States, could act as an additional drag on European economies.
“The weakening export climate amid rising global policy uncertainty and declining business confidence, exacerbated by the impact of recently announced budget measures, raises concerns about maintaining growth momentum,” said Healy Law, an economist at the National Institute of Economic and Social Research.
Vague prospects
Weak GDP numbers in October raise questions about growth expectations for next year. In October, the Office for Budget Responsibility forecast growth of 2 per cent in 2025, up from 1.1 per cent this year.
Analysts are now revising their forecasts downward. Economists polled by Consensus Economics on December 9 expected growth of 0.9 percent this year and 1.25 percent in 2025. After Friday's data, Capital Economics cut its 2025 growth forecast to 1.4 percent from 1.6 percent.
Even if this darker prognosis is correct, it still means next year will be slightly stronger than 2024. This is partly because the government's budget has boosted borrowing and spending, which should support economic activity.
“The outlook for the UK economy next year, compared to the G7, remains brighter,” said Barrett Kupelian, chief economist at PricewaterhouseCoopers UK.
