The UK economy has barely grown in almost a year and remains smaller than in March, Government borrowing costs have risen to their highest level since 2008, and it appears “stagflation” may resurface despite Government plans to boost growth and tackle inflation.
Labour’s economic plan has got off to a rocky start, with the prospect of official figures next month showing little to no growth in its first six months of government.
The Bank of England has also pencilled in no growth again for the fourth quarter, following zero expansion in the previous three months.
This combination of economic factors points to the possibility of a recession if there is not an uptick in growth.
The latest growth figures for the UK economy showed weaker-than-expected growth.
While November’s data showed a return to growth for the first time since August, the UK’s gross domestic product (GDP) staggered to a level which offered little respite to Chancellor Rachel Reeves when the figures were announced earlier this month.
The Office for National Statistics (ONS) estimated the UK economy grew in November by 0.1 per cent after falling by 0.1 per cent in both September and October.
Keir Starmer and Rachel Reeves are hoping deregulation will help kickstart economic growth (Photo: Darren Staples/AP)Most economists were expecting the UK’s GDP to rebound by at least 0.2 per cent in November.
But November’s paltry growth means the economy would need to expand by at least 0.1 per cent when December’s figures are released just to avoid contracting overall in the final quarter of the year.
If the UK’s economy shrinks over two consecutive quarters, the country would officially be in a recession.
Surging government borrowing costs
Growth figures followed a difficult start to the year for the Chancellor after government borrowing costs surged and the value of the pound slumped earlier this month amid worries over the economy and UK debt levels.
While the markets have since calmed slightly after the sell-off of government bonds fell back thanks to a surprise fall in inflation, pressure is still mounting on the Chancellor indicating that she may be on track to miss her fiscal rules.
Higher yields on government bonds – or gilts – as well as weaker-than-expected growth and forecasts for rising inflation are seen to be trimming Labour’s already slim £9.9bn financial headroom and putting Reeves’s stability rules under threat.
She is also having to contend with a bigger-than-expected surge in government borrowing last month to £17.8bn – the highest level for four years according to the ONS.
Borrowing was £10.1bn higher than in the same month last year and more than the £14.2bn expected by most economists.
The ONS said borrowing was driven higher by spending on public services and benefits, as well as rising debt interest payments, with an increase in tax receipts also offset by the previous government’s move to cut national insurance.
Borrowing in the financial year so far is £129.9bn, £8.9bn more than in the same period a year earlier – a record outside of the mammoth borrowing seen at the height of the pandemic in 2020.
Year-to-date borrowing is also about £4bn more than the £125.9bn forecast by Britain’s independent fiscal watchdog, the Office for Budget Responsibility (OBR).
The figures come amid mounting fears the economy is heading for a period of so-called stagflation – characterised by little or no economic growth combined with persistent inflation.
While figures on Wednesday showed inflation edging back to 2.5 per cent last month from 2.6 per cent in November, many economists believe it will increase to close to 3 per cent in the coming months.
The November GDP figures take in the period after Reeves’ first Budget on 30 October, which saw her announce £40bn in tax rises including a hike in employers’ national insurance.
Businesses have warned prices will need to rise to offset the cost hit while hiring also appears to be affected.
There is some good news, however. Wage growth has picked up pace in spite of wider concerns over the jobs market.
Official figures revealed that average regular pay surged to 5.6 per cent in the three months to November, which is the highest since last May, up from 5.2 per cent in the previous three months and driven by growth in the private sector.
Wages are also outstripping inflation at the fastest pace since August 2021, up by 3.4 per cent when taking the Consumer Prices Index into account, according to ONS figures.
Job market gloom
Britain’s unemployment rate has risen unexpectedly and the number of workers on payrolls has fallen by the most since the height of the coronavirus pandemic, according to figures from the ONS published this month.
The number of workers on payrolls plunged by 47,000 during December to 30.3 million – the biggest drop since November 2020. It follows a revised 32,000 fall the previous month.
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