Faisal Islam: Slow Growth Raises Stakes Even Higher for the Budget
Today’s disappointing growth figures highlight that the UK is entering a phase of slower economic growth, having previously shown stronger performance earlier this year. Notable points include:
– The economy recorded only 0.1% growth in the July-to-September quarter, falling short of forecasts.
– A contraction in increased production contributed to a decline in September’s economic performance. Specifically, the cyber-attack on Jaguar Land Rover significantly influenced this downturn, marking the worst monthly fall in car production outside the pandemic.
– According to the Office for National Statistics (ONS), had vehicle production remained stable, GDP for September would have increased.
However, there are more underlying issues:
– A slowdown in consumer-facing services and business investment raises concerns about the overall economic momentum.
– Rising employment costs and persistent uncertainty are dampening consumer confidence, with many choosing to save rather than spend.
– Businesses are holding back on investments, contributing to the overall lack of momentum.
How Slow Growth Impacts the Budget
One of the primary goals for the upcoming Budget is to break the continuous cycle of speculation surrounding potential tax changes. Key considerations include:
– Establishing a more robust buffer against fiscal shocks.
– Reevaluating how frequently the chancellor’s borrowing rules are assessed.
While seeking certainty may lead to some tax rises, the focus will attempt to shift away from taxing workers and investors.
The silver lining amidst these figures indicates a likely rate cut from the Bank of England, which could ease government borrowing costs. This trend is already evident, as key two- and five-year rates have fallen below levels when Labour took office, and fixed mortgage rates are also decreasing.
Nevertheless, tax speculation has dampened the property market, leading to reduced consumer spending. Unlike their American counterparts, UK consumers are maintaining high savings rates due to years of uncertainty and crises, resulting in a cautious approach to spending.
Despite a solid first half of the year, the UK economy has struggled to escape the pattern of slow growth. Notably, GDP growth does not account for the population size.
Although there’s potential for the UK to emerge as the second fastest-growing G7 economy this year, the upcoming Budget must simultaneously provide clarity, boost confidence among consumers and businesses, and address a substantial fiscal gap. This challenge has intensified the stakes for the Budget, underscoring the importance of addressing slow growth effectively.