For the first time today Rachel Reeves “owned” yet another worryingly below par set of economic figures.
In her reaction to this morning’s truly dismal October GDP data the Chancellor admitted they were “disappointing.” There was no mention of the grim economic inheritance from the Tories. Nearly half a year on from the joy of election day this is now on her watch. From here on in it is going to be hard pounding.
Output dropped by 0.1% in the month that ended with the Chancellor’s first Budget. That means the economy has grown only once in the past five months. While it is not dropping disastrously either, this show has basically exactly the same dreary plot as under the Tories. No growth.
Perhaps it was always absurd to expect the great ocean liner that is UK plc to pick up steam straight after polling day, but the pattern will alarm Downing Street.
Throughout October, Rachel Reeves tried to manage expectations about the Budget with a succession of gloomy, Eeyore-ish observations about the £22 billion black hole in the national accounts inherited from Jeremy Hunt.
What the public heard was, “wow this place is a total mess, it’s really going to hurt to sort it out”
Clever politics, maybe, but terrible stewardship of the economy. Chancellors, more than any other Cabinet ministers, do need to be careful with their language. What the public heard was, “wow this place is a total mess, it’s really going to hurt to sort it out”. Not surprisingly, spending decisions were put on hold, the high street caught a cold, and economic momentum was lost.
In the event, the Budget was more benign, in some respects, than many of the more doom laden forecasts predicted. But the damage was done in terms of confidence.
In addition, as the dust began to clear, it became obvious that the business sector had been whacked with a massive £25 billion hit job in the form of higher employer NI rates and lower thresholds kicking in from next April.
The knock-on effects of that are already being felt with businesses warning of higher prices and less recruitment. There will inevitably be a major shake out of jobs. IT consultants are being inundated with requests from employers about ways to reduce wage bills by replacing humans with tech. Expect to see far more QR codes and ordering screens across the retail and hospitality sectors over the coming year. In the longer run that may help with Britain’s awful record on productivity, but it will also mean longer dole queues.
The shake-out from the Budget is likely to have hit November too with the run of storms also not helping as construction workers are forced to down tools by strong winds.
As a result City economists are today rewriting their forecasts for the fourth quarter of the year. Modest growth of around 0.3% had been the old consensus. But now it looks as if we will be lucky to flatline — and a dip is entirely possible.
Most workers are getting better off now, finally, but they do not seem to be in the mood to spend
The City expects the fiscal expansion unleashed in the Budget — in the form of higher public spending and the National Living Wage hike — to inject some momentum next year. But what if it does not? Most workers are getting better off now, finally, but they do not seem to be in the mood to spend. Caution is the watchword. There are some signs inflation may start to tick up again with the Institute of Grocery Distributors — essentially the supermarkets club — warning of food inflation picking up to as much as 4.9% in 2025. That will limit the Bank of England’s scope to help out with deep interest rate cuts.
Downing Street is all too well aware that it has to deliver some more hopeful indicators — “green shoots” in the words of a former Chancellor Norman Lamont — sooner rather than later. Its entire electoral narrative was built upon delivering the growth that had eluded the dysfunctional Tories for so long.
The Government needs some quick wins to restore confidence and give consumers a reason to spend and business an incentive to invest. The mood music needs to change dramatically and the coalition with business, now badly damaged, must be rapidly repaired. In the wings Nigel Farage, with his saloon bar message of British exceptionalism, will be watching... and waiting.
Jonathan Prynn is business editor
