Pressure on Reeves after more sluggish growth – but it’s not all doom and gloom
Rachel Reeves’ handling of the UK economy is likely to come under further scrutiny after the publication of another set of lacklustre GDP figures.
The UK was the fastest growing economy in the G7 in the first half of last year. It is now on track to be stagnant in the second half, having grown in just two of the last six months.
Since sweeping to power last July, Reeves and the government have faced accusations of ‘talking down’ the economy with a barrage of messaging on the dire state of the public finances and the need for punishing revenue-raisers.
“GDP growth slowed markedly in the summer when the new government began warning of tax hikes,” said Rob Wood, chief UK economist at Pantheon Macroeconomics.
The Budget itself delivered another blow to business confidence in October, as firms struggled to work out how to deal with the extra costs.
Business surveys suggest that activity in the private sector has fallen to its weakest pace in over a year while the national insurance hike has piled further pressure onto the labour market, particularly in labour intensive industries.
December’s purchasing managers’ index suggested the private sector cut jobs at the fastest rate for nearly four years.
But is it all Rachel Reeves’ fault?
While Labour’s fiscal policies have contributed to the slowdown in economic growth, analysts say there are other factors too.
Wood noted that there were some erratic pressures in November’s GDP figures, including another steep drop in mining output – which includes the North Sea – despite a “huge surge” in oil loadings.
Matt Swannell, chief economic adviser to the EY Item Club, also pointed out that the economy has slowed during the third quarter in each of the last three years.
“Official activity estimates may be hampered by changes in seasonal output patterns after the pandemic,” he said.
However, while the UK’s economic slowdown might be slightly exaggerated by commentators, it is not enough to explain why the UK economy has slowed quite so significantly.
Are interest rates to blame?
Perhaps more important is the continued pressure from high interest rates. Last year the Bank of England received a lot of criticism for not cutting interest rates fast enough.
At the start of 2024, traders anticipated five or six interest rate cuts but only two materialised.
Capital Economics has suggested that strong economic growth in the first half of the year was largely driven by rate-sensitive sectors, which have then been among the worst performing later in the year.
“It’s not just the Budget that has been holding back the economy. Instead, the drag from higher interest rates may be lasting longer than we thought,” Ashley Webb, UK economist at the consultancy said in response to the figures this morning.
And despite the slowdown in the second half of last year, most economists are still fairly confident that the economy would recover in 2025. That’s because consumers have continued to benefit from lower inflation and elevated wage growth, leaving household finances looking increasingly secure.
“Economic fundamentals remain healthy,” Sanjay Raja, chief UK economist at Deutsche Bank said.
Looking at November’s GDP report, a rare bright spot was the recovery in consumer-facing services. Output in consumer-facing services increased by 0.5 per cent in November, following a revised fall of 0.4 per cent the month before.
“Considering that household income growth ran substantially ahead of inflation last year and that saving rates are historically still rather high, we continue to see scope for some recovery in consumer-linked parts of services in the coming months,” Sandra Horsfield, an economist at Investec said.
But Reeves will need to see the data turn in her favour sooner rather than later, or the claim that she has ‘crashed the economy’ will continue to bug her.