First, the bad news – and there is plenty of it.
Updated figures from the Office for National Statistics show that the UK economy failed to grow at all in the third quarter of the year, revised down from an increase in GDP of just 0.1%. Most forecasters, including the Bank of England, expect zero growth in the fourth quarter too.
This means that the UK may already be back in recession in terms of output per head, which fell by 0.2% in the third quarter and is on track to dip again in the fourth.
2024 was therefore a year of two very contrasting halves. In the first, the UK managed the joint-fastest growth in the G7 group of advance economies. But it looks set to end the second half at the bottom of the league table. Extending the football analogy, this loss of form is even more calamitous than the slump at Manchester City.
Moreover, every major business survey suggests that confidence has weakened sharply, and output expectations have been revised down. At the same time, inflation is picking up again and hiring has stalled. This has raised the spectre of ‘stagflation’ – a toxic combination of weak activity, rising inflation, and job losses.
So, what has gone wrong? The UK economy has been buffeted by some external headwinds. Germany and France are facing economic and political crises that, if anything, are even more severe. There is growing uncertainty too about the outlook for inflation and interest rates in the United States, especially with President Trump back in the dugout.
The Manchester City analogy is also not entirely fair. City have at least managed to win the Premier League six times in the last seven. In contrast, the UK economy has underperformed for many years. Labour can reasonably argue that they have inherited a team playing more like Everton, or Spurs, and a stadium whose foundations are shaky.
More precisely, the strong economic growth in the first half of 2024 came off the back of a dismal 2023, when output per head fell in every quarter and there was an outright recession in the second half. In that respect, the new government’s record so far is not that different from the last. The public finances were also in poor shape.
But the latest managers have clearly failed to win over either the players or the fans. Labour ministers talked down the economy over the summer, then the Budget delivered even bigger increases in tax and other business costs that most had feared.
In effect, Rachel Reeves plans to transfer another 2% of national income from the private to the public sector, half in the form of tax increases and half as higher government borrowing. And this is at a time when the tax burden is already at a record high.
It is not just the Budget, either. State intervention will be ratcheted up even further in other areas, including labour markets and energy policy. No wonder that private businesses and investors are more wary.
However, all is not necessarily lost. Planning reform remains a beacon of hope. Consumer confidence has stabilised, and most households will still see their incomes rise faster than prices. The planned increases in public spending – and especially in investment – should have some positive effects on growth next year and beyond.
The Bank of England has signalled that it is still willing to cut interest rates – and perhaps more quickly. External conditions may improve.
In the meantime, any recession is likely to be shallow by past standards, inflation will probably not rise much further, and unemployment should stay relatively low. This could better be described as a bout of ‘stagflation-lite’.
Nonetheless, once the manager has lost the confidence of the dressing room, it is hard to win it back. Even City’s Pep Guardiola is now discovering that.
This piece was first published in the i on 23 December 2024
Plain-speaking Economics 