The U.K. economy continues to hit a deadlock, up to date figures from the Office for National Statistics showed mid September. Around one-quarter (26%) of businesses reported that turnover had decreased in August 2024 when compared with July 2024. Between 7 August 2024 and 1 September 2024, it was reported that the cost of living had either gone up or stagnated. “Over 9 in 10 people (93%) reported increases in the price of their food shop, while half (50%) reported increases in gas or electricity bills”.
Gross domestic product (GDP) did not meet predictions of a 0.6 % growth for 2023. The U.K.’s services sector went up by 0,1% in July, but production and construction capacity flopped 0.8% and 0.4% respectively.
“The economy recorded no growth for the second month running” Liz McKeown, director of economic statistics at the ONS said. The U.K. economy had accounted for meagre expansion, having only just surfaced from a "shallow recession" in the new year. The U.K. went into a shallow recession in the second half of 2023, recording two straight quarters of negative growth, as inflation persistently contracted the economy.
Finance Minister Rachel Reeves said she is “under no illusion” as regards the U.K.’s economic struggles, she highlighted that “change will not happen overnight. Two quarters of positive economic growth does not make up for” many years of economic “stagnation”.
It her upcoming Autumn Statement Reeves will disclose annual budget plans which will bear bad news as she was left with a £22 billion hole in the public finances. The public are hurting from the cost-of-living crisis and high inflation. The GDP is still 0.7% lower than in 2023 - which is the "more accurate measure of the country's economic well-being – which takes account of the UK's considerable population growth – helps to explain why many Brits won't be feeling much better […]”. GDP per head is much lower than in 2022, and before the pandemic.
Why the downturn?
The Office for National Statistics revealed in February 2024 that the GDP contracted by 0,3% in the final quarter of 2023, succeeding a 0.1% decline in the preceding quarter, outsetting a recession. Services and goods inflation went up. Retail sales went down along with the restaurant and food service sectors, and a sharp drop in the construction industry. This tendency lead to the highest interest rates over the last 10 years and the Bank of England increased the interest rate to 5,25% to get the inflation to drop from 11% to 4%. Augmented interest rates pacify the economy and make it more costly to borrow, thereby scrunching spending.
Costs remain to be high and higher loan repayments put pressure on both businesses and households. Inflation is still at 4% and wages are not consistently increasing resulting in a non-resilient labour market.
Higher taxation is a drawback
Economists argue public infrastructure investment and structured resolves over tax cuts could grow the economy.
Lindsay James, strategist at Quilter Investors, claimed tax raises hinder consumer spending. “Tax rises have been flagged ahead of the Autumn Budget, and consumers and businesses may feel rather more cautious heading into the winter months as they await details from the Treasury,” she highlighted. But cuts to interest rates from the Bank of England could help economic expansion. There is some good news: The central bank is set on cutting rates for the first time in four years.
Are taxes on gas and oil the way to grow?
In the beginning of September the British government announced it plans to increase a windfall tax on North Sea oil and gas producers. Based on figures this could generate a 12 billion pound flop in revenue, decreasing production. The Labour government is convinced it would step-up renewable energy production and limit carbon emissions. Offshore Energies UK think the change would be counter-productive and cut tax revenue by 12 billion pounds. Potentially, investment in the sector would plummet to 2.3 billion pounds from around 14 billion pounds. A sharp fall in British oil and gas production is expected. The 29 % investment allowance that can be writing off taxes from if capital is re-established will be slashed.
Immigration is a strain on the public purse
Aid spending on asylum seekers in the U.K. grew to £4.3bn in 2023 up from £3.7 billion in 2022, comprising 28% of the aid budget. The Independent Commission for Aid Impact (ICAI) has warned that U.K. expenses continue to rise due to the Home Office’s elaborate spending on hotel accommodations for refugees. Other government departments also tallied up significant expenses, like health, education, housing and social benefits.
ICAI Chief Commissioner Dr Tamsyn Barton claimed:
“We have long raised concerns that the way the government manages the aid spending target, cutting across the normal lines of accountability, can lead to poor value for money for taxpayers. Allowing the Home Office to spend an unlimited amount on hosting asylum seekers and refugees, with the costs falling to FCDO’s budget, sets the wrong incentives. What’s more, using so much of the aid budget on UK asylum hotels, rather than on supporting people nearer home, is inequitable and inefficient”.
The Chief Commissioner further added that:
“The Illegal Migration Act has also caused a great deal of uncertainty as to whether people arriving via irregular routes are still eligible for UK aid to be spent on them at all, an issue we highlighted last year that appears still to be unresolved”.
In a 2023 review, ICAI found that the U.K.’s aid spending is 0.5% of the gross national income (GNI) – and “in-donor refugee costs wrought havoc on the U.K.’s development work overseas”. The review put forth six recommendations to minimise expenses, but only two were considered: that the Home Office should streamline asylum accommodation and “support contracts to drive better value for money” - involving organisations and charities to give support for asylum seekers.
Despite recommendations “almost the same number of asylum seekers were accommodated in hotels” in December 2023 as in December 2022 (close to 46,000 people). Obviously, government efforts in applying ICAI’s recommendations are lagging behind.
A positive outlook?
EY ITEM Club Winter Forecast 2024 holds some good news. Inflation may conclude the year lower than expected. The Forecast “projects that Consumer Price Index (CPI) inflation will fall to the Bank of England’s 2% target by May, while averaging 2.4% throughout 2024”.
Hywel Ball, EY UK Chair, said “slowing inflation and anticipated Bank Rate cuts” will bolster economic “momentum”. A drop in inflation and market interest rates, paired with probable additional tax reductions in the Chancellor’s Spring Budget, “suggest the UK is at a turning point in 2024 and about to enter a more positive phase of growth.”
After the Autumn Forecast’s prognosis of a 0.5% decline, business investment is on the verge of shrinking by nearly 1% in 2024. But, this may drive to a growth of 3.2% in 2025, ensuingly a similar growth is expected in 2026.
Researcher based in Washington, D.C. International Fellow of Tholos Foundation, where she works on international trade and industrial property.
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