Oct
2024
UK GDP: Can the Budget provide a path for growth?
DIY Investor
11 October 2024
Having brushed aside a 2023 slowdown, the UK economy grew by 0.7% in the first quarter of 2024 and by 0.5% in the second. However, the third quarter got off to a slow start with no increase for July compared with June, which was also a flat month, and only a slight rise for August at 0.2% – by Rob Morgan
The year-on-year figure of 1.0% growth reflects a mild but bumpy upturn from the low point in the fourth quarter of 2023. Overall, the picture is underwhelming, although still-elevated interest rates continue to act as a headwind.
Can the UK avoid a growth slowdown?
The UK economy now stands to benefit from a reduction in borrowing costs as the Bank of England gradually reduces interest rates. All else being equal, business confidence should be gathering pace and stimulating economic activity.
The picture for many households is also improving with wage growth currently trending above price rises. This is restoring spending power lost in the post-Covid inflation surge.
However, it’s still largely a picture of stagnation rather than healthy growth, so ahead of the Budget the government needs to think long and hard about how to kickstart a steeper economic trajectory.
There are several potential anchors to growth. From a macro-economic perspective inflation might reaccelerate, which would mean interest rate cuts are shallower than anticipated and act as a brake on activity. But the greater fear at this stage is political. With the government having spoken in cautious tones about the economy and warning of ‘difficult decisions’ around tax and spending, it is harder for businesses to retain confidence about the environment going forward.
The Budget – kill or cure for UK growth?
If the rumour mill is to be believed there are some policies being contemplated by the government that could undermine investment and growth. For instance, imposing higher rates of National Insurance on employers could lead to businesses curtailing new hires, limiting pay rises, scaling back pension contributions, or else passing extra costs on in higher prices. For some already-stretched small businesses an additional tax on employing workers could be the nail in the coffin.
Rumours also circulate surrounding capital gains tax rises which, if enacted, could end up doing more harm than good. Increasing the rate of CGT discourages the regular recycling of capital for investment and incentivises holding onto assets, perhaps unproductive ones, for longer.
A Budget that emphasises kickstarting growth to ultimately increase the tax base could dispel many of these worries, and ideally set the stage for greater confidence and investment. Clearly there are some significant structural problems to deal with. But solving the economic ones could be the key to helping with the others. Weak levels of investment and company formation alongside low labour force participation are impediments to economic expansion and the government needs to tackle these as a priority.
In the build up to the election there were plenty of encouraging noises within the Labour campaign around encouraging growth while remaining fiscally responsible. The manifesto declared, “Sustained economic growth is the only route to improving the prosperity of our country and the living standards of working people”. We hope this more positive mindset will be echoed in the Budget.
What does it mean for interest rates?
The stagnant growth picture won’t prompt any significant inflationary concerns among the MPC decision makers at the Bank of England. It’s also not so obviously weak to infer that rates are too restrictive, but it does tilt the balance towards a further cut in November a little.
Governor Andrew Bailey’s comments that the BOE could be “a bit more aggressive” with cuts if inflation data remains favourable did briefly raise hopes of a steeper downward trajectory for UK interest rates. However, this doesn’t really depart from his overall stance of data dependency. Moreover, the more inflationary picture emanating from the US and continued sticky wages and services prices calls for only a gradual withdrawal of restrictive policy.
For the November meeting another 0.25% cut looks firmly on the table. By this stage the ramifications of the Budget can be digested by MPC members. Particularly tight fiscal policy might encourage the Bank to reduce rates at faster clip. Overall, a shallow trajectory of cuts towards the 4% level over the course of the next year still looks like the most likely scenario. Inflationary pressures are easing but they are not vanquished altogether.
Rob Morgan is Chief Investment Analyst at Charles Stanley
“UK GDP growth has been modest at best, with construction and manufacturing showing an increase to 0.4% in the latest August figures” by Scott Douglas
“Recent CBI data estimated that there’s some bright hotspots for UK economic growth, with the net zero sector outpacing the wider economy. The Government has already announced several large green capital investments across carbon capture and storage projects; while commitments to housebuilding should also provide reason for optimism.
All eyes will now turn to the new Government’s autumn budget as Labour promises to put growth at the top of the agenda. However, concerns linger over the prospect of higher taxes, which has weighed heavily on the minds of both businesses and consumers. Tax clarity and support to unlock further investment in infrastructure and net zero will be key to supporting the UK’s GDP growth in the medium-to-long-term.”
Scott Douglas is Capital Markets Director at international corporate finance firm Centrus
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