Economic update: Businesses and consumers in standby mode

In the run-up to the Budget on 30 October, economic growth in the UK has slowed slightly, after it was the fastest among G7 countries in the first half of 2024.

Some surveys indicate that manufacturers are uncertain about their output, and consumer confidence in the economy and their own finances has fallen (although sales were higher this summer than last year).

The Bank of England has kept interest rate unchanged at 5%. It wants to ensure that inflation doesn’t pick up again due to persistent inflation in services.

Relatively strong initial growth in 2024 tapering off mid-year

The UK continued to recover from a shallow recession happened in the second half of 2023. UK GDP is estimated to have grown by 0.5% in May to July 2024 compared with the previous three months (February to April). However, according to month-on-month data, there was zero growth in June and July. The services sector, which represents four fifths of UK economic output, grew by only 0.1% in July 2024. Manufacturing output fell by 1% over this period, while construction fell by 0.4%.

On a more optimistic note, quarterly GDP data showed that the UK economy has grown at the fastest rate among the group of G7 countries in the first half of 2024. In Q1 2024 (January to March) GDP grew by 0.7%, while in the second quarter, it rose again by 0.6% compared with the previous quarter. From April to June (Q2), the UK’s growth rate surpassed the average across the Eurozone (which rose by 0.2%, with German GDP falling by 0.1%) but trailed the US, where the economy grew by 0.7% over the same period.

Businesses uncertain about the near future

Despite indicators of increasing growth, businesses seem less convinced that good news will persist. The Confederation of British Industry’s (CBI) Industrial Trends survey shows that manufacturing output fell in the three months to September. More companies thought their output would fall further over the coming three months than thought it would rise (see chart below).

The UK purchasing managers’ index (S&P Global/CIPS PMI), another indicator of economic trends, was positive at 51.5 for manufacturing and 52.8 for services (PDF). Values above 50 indicate an expansion, and values below 50 indicate a contraction in the economy.

However, the PMI was lower in September than in August (52.5), interrupting a five-month long trend in increasing manufacturing production. Also, the services PMI was down from 53.7 in August.

Although manufacturing businesses continue to expect strong activity, some are worried about lower global demand. Many survey respondents in manufacturing and services mentioned uncertainty ahead of the government’s autumn Budget.

Consumer confidence drops

Consumer confidence has also fallen, reaching a similar level to that at the beginning of 2024. GfK’s consumer confidence index fell by seven points to -20 in September compared with August. The index shows consumer expectations regarding their own financial circumstances and the overall economic situation.

Some experts and politicians questioned by the Financial Times said they thought that consumer mood could have been affected by warnings from the Prime Minister and the Chancellor intended to prepare the public for “painful” measures in the upcoming Budget.

At the same time, retail sales volume (the quantity of items bought) in Great Britain has been slowly rising in the three months to August. Data from the Office for National Statistics shows it increased by 1% compared with the same period in 2023.

“Tough decisions” in the Budget

On 30 October 2024, Rachel Reeves will become the first female Chancellor to present the UK Budget. The Chancellor says she faces tough decisions in setting the government’s tax and spending policies.

The Chancellor will be looking to ease the spending pressures on public services and make investments while keeping within the government’s self-imposed fiscal rules, although it is not clear what these will be yet.

Labour has ruled out increases to rates of income tax, national insurance, VAT and corporation tax, so if the Chancellor needs to raise tax revenues, she will have to consider raising other taxes.

The Budget will include some relatively small tax rises pledged in Labour’s manifesto. The tax rises, including applying VAT to private school fees, are being introduced to pay for the manifesto’s spending commitments in areas such as health and education.

Bank of England keeps interest rate at 5%

On 19 September, the Bank of England’s Monetary Policy Committee announced that the Bank’s main interest rate will remain at 5%. This had been expected. The Bank said that it chose a gradual approach to lowering interest rates, guided by the need “to squeeze persistent inflationary pressures out of the system”. The chart below shows the Bank’s interest rate since 2007.

Annual CPI (consumer price inflation) in August was stable at 2.2% the same as in July. However, inflation remained higher in August (at 5.6%) in some sectors, including consumer services such as restaurants and hairdressers.

The Bank of England is grappling with the decision of how quickly to reduce interest rates from their current relatively high level. It wants to ensure that inflation remains at around 2% and doesn’t pick up again due to persistent inflation in services, while also not leaving rates too high, which could negatively affect economic activity.

Bank of England Governor, Andrew Bailey, said that if inflation falls further, the bank could gradually lower the interest rate. However, he warned consumers not to expect a return to the historically low rates of the past four years. Economists surveyed by the Treasury forecast that inflation for the last quarter of 2024 (Q4) will be higher, at 2.6% (the Bank of England has estimated it will be 2.5%) before falling in 2025.

About the author: Ilze Josepa is a researcher at the Commons Library specialising in international trade.

Image credit: Ian Capper on geograph.org.uk, CC BY-SA 2.0