UK economy dubbed ‘stagflation-lite’ as Starmer talks up ‘patriotic’ growth mission
The UK economy is not expected to have recorded any growth in the month of July as leading analysts suggest that a lack of clarity over Labour’s future policies are hitting firms – despite a call from the prime minister for ministers to take on a “patriotic duty” to drive growth.
Rachel Reeves and Keir Starmer will be hoping to see a surge in growth in the lead-up to the Autumn Budget, defying expectations and fending off criticism that they are overseeing decline.
But a Bloomberg consensus for the month of July suggests that the UK economy was stagnant, with GDP expected to remain unchanged.
Deutsche Bank’s Sanjay Raja said there would be a “course correction” in trade-fronting, stockpiling and public sector spending over the second half of the year, putting brakes on UK growth.
He said he expected the services sector to shrink in July due to lower information and transport activity, despite the women’s Euros final and good weather potentially bringing a lift to the UK economy.
Construction and the majority of industrial production sub-sectors are also expected to decline in the month, with independent survey data pointing to worrying trends in activity given lower levels of employment, wage growth and “Budget uncertainty” ahead of November.
UK economy ‘to lose momentum’
Analysts at Oxford Economics said that the UK was “stagflation-lite” due to low growth and high inflation.
Its chief UK economist Andrew Goodwin said strong growth in the first half of the year was an “anomaly rather than a sign that the UK economy has emerged from years in the doldrums”.
He predicted the UK economy will lose momentum as the end of the year closed in, with its annual growth prediction of just 0.9 per cent being lower than a consensus of 1.1 per cent and the Bank of England‘s 1.25 per cent forecast.
“Our relative pessimism is largely based on the strength of domestic headwinds,” said chief UK economist Andrew Goodwin.
“We calculate that fiscal policy is being tightened to a greater extent in the current fiscal year than in any of the past 15 years except the pandemic period. Though the squeeze will be smaller next year, we estimate it will still be comparable to the most austere years of the 2010-2015 coalition government.”
Goodwin said growth was likely to be slower in the lead-up to the Autumn Budget, though played down claims the UK was heading for a 1970s-style crisis that would see it approach the International Monetary Fund for a bailout.
He said Reeves will need around £30bn in extra revenue to rebuild her headroom due to higher borrowing costs and U-turns on welfare.
“The government appears keen to stick to its 2024 election manifesto commitments not to increase national insurance; the basic, higher, or additional rates of income tax; and VAT.
“It will probably blur the lines on those commitments by extending the freeze on most tax thresholds and allowances for another couple of years beyond 2027-2028 – a tax rise in all but name.
Starmer addresses new ministers
Starmer addressed his Cabinet for the first time on Tuesday by calling out Reform’s “politics of grievance”.
He added that the government had a “patriotic duty” to overcome a fall in living standards across the UK.
“It’s them that we have in our mind’s eye as we go forward and our mission is the triumph of national renewal over divide and division and decline,” he told his ministers in the first meeting since a sweeping reshuffle over the weekend.