Week in Business: Small glass of champagne for Reeves?
Crack open the champagne – the economy grew more than expected in the first three months of the year. But, that’s growth in the rear view mirror…is there any on the horizon?
If your defining mission in government is, apparently, to generate economic growth – and if you’re nervous about the impact of global economic uncertainty and weak domestic economic indicators, you’re going to treat a 0.7 per cent uplift in GDP as a gift from heaven, even if it was lower than the same period last year (0.9 per cent) and even if analysts say the figures were boosted by a temporary output surge as firms rushed to get ahead of Trump’s tariffs.
But even in that context, the Chancellor would be entitled to a little glass of buck’s fizz with her morning croissant because in febrile times even small numbers can have a big impact.
Reeves said this morning that today’s growth figures “show the strength and potential of the UK economy” and that the government is “making the right choices in the national interest.”
I suppose this depends on where you put the bar.
If economic success is judged by not doing as badly as expected, relying on businesses soldiering on under the weight of new taxes and, perhaps ultimately scraping 1 per cent annual GDP growth then yes, Reeves is making a success of it.
Ministers will insist that this modest uptick in economic growth vindicates their decisions but it’s more likely that the economy grew in spite of government policies, rather than because of them.
Best part of the year may already be behind us
Yael Selfin, chief economist at KPMG, warned that “the growth spurt was set to be short lived” and that “Economic momentum is expected to slow significantly over the coming quarters … due to both domestic and global headwinds hampering business activity.”
This appears to be a consensus view among economists.
Paul Dales at Capital Economics warned that “The best part of the year may already be behind us” adding that “the bumper rise in GDP is unlikely to be repeated as a lot of it was due to activity being brought forward ahead of US tariffs and the rise in domestic businesses taxes.”
In other words, if Reeves looks ahead to the next three months she’ll probably want to limit herself to just the one glass of bucks fizz.
We know from ONS data released this week that the number of payrolled employees has fallen by around 80,000 since the start of the year and that employers are nervous about making new hires or creating new roles.
The CIPD revealed on Monday that confidence among UK employers has fallen to a low only previously seen during the Covid pandemic, with more than a quarter of private sector respondents to their survey planning to make redundancies – and very few planning to expand.
Sentiment surveys also paint a gloomy picture though it should be noted that businesses – and individuals – always seem to be more optimistic about their own economic prospects than they are about the wider economy. Make of that what you will.
Searching for growth
Meanwhile the government continues to push ahead with welcome structural reforms and this week two of the Cabinet’s big beasts were out and about in the Square Mile.
Rachel Reeves was in the City hailing the latest move by some of the country’s biggest pension funds to commit to increasing the amount they invest in UK private markets and infrastructure assets. It’s a policy that looks great on paper – Reeves said it could add £50bn into the UK economy over the next few years – but the pension funds’ commitment is so riddled with caveats – justifiable caveats – that it’s unlikely to move the dial.
Then defence secretary John Healey bowled into the London Stock Exchange to unveil plans for a new defence ‘marketplace’ aimed at speeding up defence procurement and opening new avenues for UK firms to get a piece of the action.
He declared that the UK’s defence sector is “open for business” and while the motivation for this is pretty grim – war – ministers are leaning into the benefits of these dangerous times – pushing for greater investment and innovation in the UK’s defence sector, be that tech or advanced manufacturing.
In other words, life goes on; GDP figures are backwards looking and while that data is gathered and assessed ministers are out and about trying to move the needle on growth, on long term growth – and all power to them – because we’ll need to squeeze every possible drop of economic growth if we’re to avoid another punishing Budget in October.
On that note, one of the Chancellor’s most senior economic advisers warned yesterday that the government will have no choice but to raise taxes in the Autumn.
Nick Williams, who was in charge of Labour’s economic policy in Opposition, left Downing Street last month, said that the current approach to the public finances is “not credible” and that “taxes will have to go up.”
Asked about this, Treasury Minister Emma Reynolds said the government had no plans to increase taxes on individuals. Well, that just leaves businesses.