UK economy under Labour stalls - what that means for you and your money

Labour is facing a headache with its dependency on a growing economy to gather more tax

(PA/Getty)

Chancellor Rachel Reeves has said she is “not satisfied” with the performance of the UK’s economy after it grew by a meagre 0.1 per cent in the three months to the end of September.

Economists had expected 0.2 per cent growth during the period – in itself hardly a stellar performance, and it comes after 0.5 per cent growth during the previous three months.

The growth figure is a problem because of the government’s dependency on a growing economy to gather more tax.

A growing economy means more profits for companies and growing personal incomes which, in turn, increases HM Revenue & Customs’ income, which will help pay for the improved NHS and other services Ms Reeves says she wants.

But her recent Budget may have cooled the appetites of households and businesses to spend, both before and after the event.

Danni Hewson at stock broker AJ Bell said: “Nervousness from households ahead of the Budget dampened consumer behaviour and even though the retail sector did pick up in a bit in September people were being cautious, especially when it came to those nice personal investments such as haircuts and manicures.”

Change in retail prices

In order to patch up government finances, Ms Reeves hiked tax for employers in the shape of employers National Insurance, despite warnings that doing so could curb wages. Big employers including retailers and pub chains have said prices could rise as a result.

“For business the spectre of higher taxes was already pushing many companies to employ a wait and see approach when it came to investment and hiring plans. The big question is what will happen to those plans now the dust has settled and the numbers have been crunched,” said Ms Hewson.

The Budget is only one part of it, with other factors such as extra costs associated with Brexit also cooling spending habits.

A quick rate cut for borrowers is probably not on the cards (Yui Mok/PA) (PA Wire)

Ben Jones, lead economist at the Confederation of British Industry, agreed that uncertainty ahead of the Budget “probably played a big part”, after firms reported a slowdown in making spending decisions.

Another thing to bear in mind is the small nature of the move over a three-month period in the wider context of the economy.

Luke Bartholomew, deputy chief economist at the investment giant Abrdn, said it is “possible that this just represents normal monthly volatility rather than anything more fundamental”.

The move is unlikely to upend Ms Reeves’ spending plans, which include a 4.7 per cent rise in NHS and education expense, plus £2.9bn for defence and £1.3bn for councils.

Bank of England interest rates

Weaker growth can tempt the Bank of England into cutting interest rates to cut borrowing costs and give companies and mortgage holders more money to spend on other things.

But this is unlikely, according to Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, at least in the short term.

Bank policy makers will “likely be concerned enough over inflation risks from the Budget and growing global headwinds to resist signing off back-to-back interest rate cuts.”

Companies hiring new staff

Sanjay Raja, chief UK economist at Deutsche Bank, said: “The road ahead remains bumpy.”

He added that the tax rises could hit business spending before Labour’s own spending plans start having an effect in 2025.

This could mean less hiring of new staff and spending on equipment and other services.

“We see growth picking up a touch towards year-end. And we still see positive momentum into 2025,” he said.

“But downside risks are brewing. Geopolitical risks are on the rise with the spectre of a trade war looming.”

Liz McKeown, ONS director of economic statistics, said some sectors like retail and construction performed well, but added: “Generally, growth was subdued across most industries in the latest quarter.”