The UK economy is unlikely to see any growth in the wake of the Chancellor’s Budget, as businesses respond to record tax measures by raising prices and cutting employment levels, the Bank of England has warned.
Policymakers now expect the economy to remain flat in the final quarter of 2024, a notable decline from their previous forecast of 0.3%. This comes after figures showed production shrinking in October, raising concerns that a recession could be on the horizon.
Although the bank’s Monetary Policy Committee (MPC) voted on Thursday to maintain interest rates at 4.75%, Governor Andrew Bailey indicated that the road ahead remains uncertain. He stressed that the Bank is not in a position to commit to future interest rate cuts just yet, given the ongoing uncertainty following the Chancellor’s first Budget.
Analysts have warned that households and businesses could face further cost pressures until 2025, leading to a difficult mix of weak growth and persistent inflation.
A survey by the Bank of England suggests that a growing proportion of households now expect stagnant economic conditions to become the norm. “There is a common view that the UK was moving from a cost of living crisis to a prolonged period of rising costs and falling standards of living,” the report noted.
Businesses appear to be responding to the Chancellor’s decision to raise employers’ National Insurance contributions by £25bn with moves that could keep inflation high for longer. Many choose to raise prices rather than reduce wages, while reducing employment and working hours.
The Prime Minister admitted that improving living standards “will take time” and “will not be fixed by Christmas”. Meanwhile, the Chancellor stuck by the government’s commitments and insisted that low-income families are already feeling the benefits of the latest measures.
However, the bank survey painted a more cautious picture. Some families felt that official comments about economic stability and inflation approaching 2% did not fit their life experience, with many saying their daily costs remained high.
The Bank of England added that the increase in National Insurance is “significantly impacting sentiment” among businesses, reducing its optimism about the speed and scale of any potential recovery. Consumer concerns have also extended to the real estate market, with the bank noting that buyers are increasingly reluctant to make major financial commitments amid the current economic climate.
Economists at Citi noted that several factors, including price increases planned for next year, could keep inflation levels stubbornly high. HSBC analysts said expectations had investors seeing the UK drifting towards stagflation, which could justify higher interest rates even if growth slows and unemployment rises.
The minutes of the last meeting of the Monetary Policy Committee revealed differing views among policymakers on the long-term impact of the budget on economic growth. Three of the nine members favor an immediate cut in interest rates, but the majority, including Governor Bailey, expressed concern that inflationary pressures remain too uncertain to allow for a rapid shift in policy.
Market expectations are currently leaning towards a possible rate cut in February, but Bailey made clear that any move to reduce borrowing costs would be gradual. “We must ensure that the 2% inflation target is achieved on a sustainable basis,” he said, adding that the bank remains cautious given the high level of uncertainty.
Companies themselves have expressed surprise at how much National Insurance has risen, especially the low threshold at which employers start paying. Many expect this to lead to higher overall labor costs, especially in sectors that rely on part-time or low-wage employees.
In response, some companies are considering investing in automation or even offshoring, as they seek to mitigate the impact of rising costs and maintain competitiveness in an increasingly difficult environment.