The UK economy is stumbling into the New Year on the brink of recession. There are still some good reasons to hope for a bounce next spring, but only if the government changes course.
The recent news has mostly been grim. Only some favourable rounding prevented the headline figures from showing that the economy shrank in every single month from July to October. November is unlikely to have been much better.
The economy began to falter in the spring when the increases in employers’ National Insurance and other business costs in last year’s Budget finally kicked in.
There was then a brief recovery as fears of a global trade war faded, but this was followed by an extended period of uncertainty ahead of this year’s Budget. The leaks, unhelpful speculation and negative briefings clearly undermined confidence and activity across large parts of the economy.
The Bank of England now expects zero growth overall in the final quarter of the year – and even that may be too optimistic.
The usual definition in the UK is two successive quarters of negative growth. On that basis, the UK is not in recession, or at least not yet, because the economy grew by 0.1 per cent in the third quarter.
But the UK economy may now be on the cusp of a significant decline in activity that is spread across the economy and lasts more than a few months, which is the usual definition of recession in the US.
Either way, this period will certainly feel like a recession to businesses struggling to stay afloat and to people worried about losing their jobs. Even if GDP growth is just the right side of zero, it will be far short of the numbers required to repair the public finances.
The easing of uncertainty after the Budget might still allow a bounce in activity next spring. In contrast to 2024, most of the latest tax increases will not take effect for several years. It is also still possible that any recession, however defined, will be a relatively shallow one by past standards.
The interest rate cut hides a very sharp cliff edge. This is why the UK is on the brink of recession
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The combination of falling activity, high inflation and rising unemployment that the UK is experiencing now is still only ‘stagflation-lite’ compared to the full-fat version of the 1970s.
Unfortunately, it is hard to restore economic confidence once it has been lost. The early evidence from post-Budget surveys of businesses and consumers is mixed, but sentiment is fragile.
The Government appears to have given up on growth in favour of policies aimed at redistributing income, favouring welfare instead of work and wealth creation.
This has undermined incentives and squeezed much of the positivity out of the private sector. Against this backdrop, the Bank of England’s decision to cut interest rates again in December is little to cheer.
The decision was made easier by some slightly better news on inflation, but also reflected concerns about the weakness of the economy and mounting job losses.
It would be far better if interest rates were being cut because the supply-side performance of the economy was improving and productivity was increasing, allowing faster growth without higher inflation.
But this is unlikely to happen as long as the government pursues policies built around higher public spending, higher taxes, and even more state intervention. All is not necessarily lost.
The Government appears to be getting serious again about planning reform and smarter regulation of the financial sector. Even the Prime Minister now seems to recognise that too much red tape is holding back growth.
But for every step forward, there seem to be at least two steps backwards, notably in the way the government looks at energy and labour markets.
More effort is now also being wasted in trying to improve relations with the EU rather than making the most of the opportunities created by Brexit. None of this is inspiring confidence – and without confidence, the economy cannot grow.