Has Rachel Reeves talked the UK economy into a downturn?
Were all the warnings true? Economists and business groups had been cautioning for weeks in the run-up to the Budget that the government’s negativity might impact economic activity. And now it seems there’s proof.
The economy expanded just 0.1 per cent in the three months to September, below expectations and down from a 0.5 per cent expansion in the previous quarter.
In the month of September, the economy actually contracted whereas City economists thought it would grow 0.2 per cent.
This means the economy has only actually expanded in two of the last six months. Jeremy Hunt’s mini-boom looks like a distant memory.
Perhaps this should be no surprise. Multiple surveys show that both consumer and corporate confidence were falling in the weeks leading up to the Budget, as fears about a potential tax hike dominated.
Mel Stride, the shadow Chancellor, was sure of where he put the blame. “Across the quarter…it was their (the government’s) mission to talk down the UK economy,” he told Times Radio.
But the figures reveal a slightly different story.
Household consumption actually accelerated on the previous quarter, rising 0.5 per cent following a 0.2 per cent expansion in the second quarter.
Business investment also came in ahead of expectations, even if it was slightly weaker than the previous quarter. It rose 1.2 per cent in the three months to September, down from 1.4 per cent.
“Worries about the effect of Budget measures seem to have had a limited effect on consumers and businesses, many of whom have chosen not to ‘wait-and-see’ what the announced measures could bring before committing to spending,” Yael Selfin, chief economist at KPMG UK said.
So what was driving the deceleration?
Looking at the monthly figures, the main culprit for the UK’s surprisingly sluggish performance was the information and communication sector, which fell 2.0 per cent month-on-month.
Rob Wood, chief UK economist at Pantheon Macroeconomics, said this was an “erratic” movement, arguing the underlying trend was “stronger than the headline fall”.
The quarterly accounts, meanwhile, show a large fall in net trade due to the UK’s status as a gold trading hub. This essentially offset the positive contribution from strong household spending and resilient business investment.
Wood said this “reflects nothing about the wider economy”.
None of this is to say that the economy performed particularly well. It did not. And neither is it to say the Budget will not have an impact on growth.
Many firms from many different sectors have warned that the Budget tax increases will force them to cut jobs, slow the pace of pay rises or raise prices. This is likely to affect growth.
“Private sector investment plans may start to get trimmed. And hiring plans are likely to be put on ice. Indeed, cracks in the labour market are already emerging,” Sanjay Raja, chief UK economist at Deutsche Bank said.
Julian Jessop, economics fellow at the right-wing Institute of Economic Affairs, said: “The new Chancellor’s first Budget will cast a long shadow for some time to come”.
Throw in the re-election of Donald Trump and the risks he poses to global trade, and downside risks to the economy are building – and building fast.