During the election campaign and after successfully coming to power, Prime Minister Starmer and Finance Minister Rachel Reeves of the British Labor government declared on many important occasions that promoting economic growth is the highest priority political goal of this government. But the latest economic data may put the Labor government in an embarrassing position.
Data released by the British Office for National Statistics on the 15th showed that the British economy grew by 0.1% in the third quarter of this year, lower than market expectations. In September, British economic growth fell into a contraction, shrinking 0.1% month-on-month. In terms of per capita GDP, it fell by 0.1% quarter-on-quarter in the third quarter.
Since early July, the British Labor government has been in power. Therefore, the economic growth rate in the third quarter is considered to be the first “report card” of the current Labor government’s 100-day New Deal. For comparison, in the first half of the year when the Conservative Party was in power, the British economy grew at a quarter-on-quarter growth rate of 0.7% and 0.5%.
Rachel Reeves said she was very dissatisfied with the third quarter economic growth data. Reeves once again emphasized that promoting economic growth is at the core.
The UK economy’s growth slowed sharply in the third quarter, closely tied to Labour’s autumn budget. Although the British Treasury only officially released a more detailed draft of the autumn budget at the end of October, the Labor Party’s announcement of the fiscal deficit of the previous government and its plan to consolidate the finances had a significant impact on business investment and personal consumption.
On July 29, the fiscal review results announced by the Chancellor of the Exchequer showed that the British public finances faced a expenditure gap of 22 billion pounds. In order to make up for the fiscal deficit and increase investment in public services, the Labor government may increase taxes while reducing expenditures. On October 30, these concerns became a reality when the Labor Party announced a tax increase of 40 billion pounds, most of which would be borne by businesses.
Suren Thiru, head of economics at the Institute of Chartered Accountants in England and Wales, said: “The latest economic data shows that the economy has cooled even before the budget, as weak business and consumer confidence weakened output throughout the third quarter. Especially in September.” Thiru also raised the issue of a rate cut by the Bank of England, noting that the possibility of a rate cut at the BoE’s next meeting in December now looks unlikely as rising inflation risks and global headwinds may prevent policymakers from successive cuts.
Ben Zaranko, senior economic research expert at the Institute for Fiscal Studies (IFS), a British think tank, pointed out that British public services need more investment and defense spending also needs to increase. The core of these problems will be attributed to where the money comes from. Due to the limitations of fiscal rules, the British government cannot borrow more debt, and the only thing left is an increase in taxes. Possible areas include capital gains tax, inheritance tax, etc.
In the residential sector, British residents instinctively cut back on spending and consumed prudently in the third quarter due to concerns about the impact of tax increases on personal affordability.
Data from market research company GfK on October 25 showed that the British consumer confidence index in October hit a new low for the year. Neil Bellamy, director of consumer research at GfK, pointed out that despite the decline in inflation, British residents’ consumer confidence is still insufficient, which is mainly triggered by the upcoming fiscal budget of the British Treasury. Both the British Prime Minister and the Chancellor of the Exchequer have stated that they will raise taxes to make up for the fiscal deficit, causing British residents to remain wary of consumption before the policy is officially introduced.
Liz McKeown, director of economic statistics at the Office for National Statistics, pointed out that the economic slowdown has become a widespread phenomenon, with most industries showing weak growth in the third quarter. While retail and new construction volumes increased, telecoms and wholesale sectors suffered declines. On a per capita basis, the economy contracted 0.1% in the quarter, a change that reflects the impact of population growth.
In the corporate sector, due to uncertainty about the future financial direction, entrepreneurs have to temporarily restrain their investment intentions and wait and see. Regarding the latest third-quarter data, Ben Jones, chief economist of the Confederation of British Industry (CBI), pointed out that the British economy stagnated in the third quarter. Uncertainty ahead of the Budget may have played a major role, with companies generally reporting a slowdown in investment decisions.
Due to the lack of consumer confidence among residents, the service industry, which is the main driving force of British economic growth, lost growth momentum in the third quarter. In the third quarter, the British service industry grew by 0.1% month-on-month, while in the previous first quarter and second quarter, the service industry grew by 0.7% and 0.8% respectively.
Economists expect economic growth to accelerate next year as the cost-of-living crisis recedes and the Bank of England’s interest rate cuts begin to take effect. However, the level of economic growth predicted by the private sector remains well below the ambitious levels Starmer has promised. The Bank of England is paying close attention to GDP data as it winds down its policy of 14 consecutive rate hikes to combat inflation.
Last week, the Bank of England announced a 25 basis point interest rate cut at its policy meeting, bringing the benchmark interest rate to 4.75%. The UK inflation rate fell sharply to 1.7% in September, falling below the Bank of England’s 2% target for the first time since April 2021.
However, the Bank of England said that the downward path of inflation may not continue. It is expected that the Labor government’s tax increase budget will promote GDP growth by 0.75 percentage points within one year. At the same time, the fiscal plan also caused them to raise their inflation expectations.
Comprehensive report from Beijing Business Daily
(Source of article: Beijing Business Daily)
Source of article: Beijing Business Daily
Author of the article: Beijing Business Daily Comprehensive Report
Original title: Economic cooling puts pressure on the British Labor government to increase sharply
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