From the Desk of the Chief Economist February 2025

Growth, growth, growth…

At the end of January, we had more information on how the government was going to streamline planning, prioritising faster decision-making, local empowerment and digitisation. Then we had the Chancellor’s growth speech, outlining a growth strategy built around stability, reform and investment. It included support for a third runway at Heathrow, expansion of other regional airports, funding for the transport links to support the Oxford-Cambridge “arc”  and a review of the Treasury’s much maligned “Green Book” (widely judged to fuel a London bias to infrastructure investment).

Bank of England sounds cautious note

Unfortunately, along came the Bank to pour cold water on the Chancellor’s upbeat tone.

On the positive front, the Bank delivered a widely expected 25 basis point reduction in interest rates to 4.5%, with two members (Catherine Mann and Swati Dhingra) both voting for a heftier 50 basis point cut. A rate cut was fourth in the list of actions recently identified by IoD members that could lift confidence. And further cuts seem likely this year, with interest rates set to end the year around 4%.

But the Bank unveiled a significant downward revision to 2025 growth, which they now expect to reach only 0.8%, down from their November forecast of 1.5%, mostly reflecting unexpected weakness in the second half of 2024. In further bad news, the Bank judged that the UK’s potential growth rate – i.e. the extent to which it can grow without generating inflationary pressures – has also been weaker than they thought, meaning there’s no additional scope for interest rates to fall faster and cushion the economy. And the third piece of bad news was the inflation forecast: the Bank expect inflation to rise to 3.7% later in the year, which will erode consumer incomes. Alongside an assessment from the Bank that the Budget will weigh on employment, and with consumer confidence already depressed, the consumer is set for a challenging year.

Flurry of policy announcements expected

We’re expecting a busy year of policy announcements as the government’s strives to get unclog the economy through de-regulation, planning reform and longer term policy making. IoD members are taking advantage of opportunities in technology and AI and are looking for a reset in the UK’s trading relationship with the EU. But the significant increases in employment costs (through NI, employment rights and the minimum wage) are requiring significant strategic resets for a large proportion of companies. We’re continuing to push hard for the scope of the employment rights regulations to be scaled back, as well as for some of the most damaging tax changes to be reconsidered.

The Chancellor may be keen to move on from the Budget, but the OBR stands ready to keep it front of mind. We’ll get the OBR’s forecast update on the 26th March, and expect the Chancellor to respond to it in the House. Because the Chancellor left herself so little fiscal headroom, and because the economy has been so much weaker than the OBR expected, there’s a high probability that more money will need to be found in future years. The fiscal rule that matters here is for the current budget (i.e. excluding investment spending) to be in balance by 2029-30. So a small fiscal rule miss should not necessitate significant moves in either spending or taxation in the near-term.