
From The Desk of The Chief Economist January 2025
Welcome to the first edition of this monthly newsletter where I’ll be giving my key takeaways on the latest economic news.
New Year has a bumpy start in financial markets
The year has started with jittery financial markets, driving fresh criticism that the government has undermined growth. But the extent to which the spike in gilt yields in the UK have been blamed on UK government policy is overdone. Gilt yields have largely moved with US Treasuries, reflecting higher interest rate expectations in both economies. In the US, Trump plans to stimulate demand (through tax cuts) and impair supply (clamping down on illegal immigration, implementing tariffs) will deliver a double-whammy of inflationary pressure. In the UK meanwhile, the government is pushing on inflation through a significant increase in public sector spending, but risking private sector growth simultaneously through strong tax rises. The (mild) UK premium over US government borrowing costs reflects the fact that the UK’s policy mix (ironically) is more risky for the public finances.
While it’s unfair to blame the UK government for gilt market turbulence specifically, the same can’t be said for the state of the economy. Data for the second half of 2024 has been largely disappointing after a strong first half: GDP has come in weaker than expected in 4 out of 5 months; and December retail sales strongly disappointed, falling by 0.3% on the month driven by weak food sales. And while momentum was always expected to fade, it looks to have been almost entirely snuffed out. This has taken the likes of the Bank of England by surprise: in November, the Bank were expected the economy to grow by 0.5% over the second half of 2024; a month later, there expectation had changed to zero. And the main factor that’s shifted in the UK over that period is business confidence, driven down by a persistently negative tone from government followed up by a significant increase (some £40 billion) of tax increases.
What now for the UK economy?
Despite the growth volatility over the last year, expectations for growth in 2024 and 2025 haven’t changed over the last six months. HM Treasury’s comparison of the most recent independent forecasts (from banks, macro and other consultancies, think tanks and business groups) still has growth at 0.8% and 1.3% respectively in 2024 and 2025 – the same as they had in June. On balance, the hit to the private sector is expected to be counterbalanced by stronger public sector spending – the Budget unleashed one of the largest fiscal loosenings in recent decades according to the OBR. Meanwhile growth will be supported by further falls in interest rates over the year (even if we may only see a 50 basis point reduction rather than 100), as well as strong growth in consumer incomes.
Risks to growth continue to shift as geo-political tensions evolve. Economic policy uncertainty has shot up, following a year of many elections globally. Trade policy is a particular risk to global growth, as well as public finance stability in the developed world and China. Expect the unexpected when it comes to trade policy, as well as further volatility in borrowing costs.
In search of growth
In the UK, after decades of weak productivity growth and a rather shaky start, the new government is feeling the pressure to deliver on its growth ambitions. What should it do this year? Two things: deliver a positive growth narrative, and then deliver it. There are already signs that the government is trying to talk up growth, which is welcome. The Chancellor is expected to deliver a growth speech at the end of January, and has been busy in China and Davos outlining the government’s pro-investment strategy, as well as pushing regulators to focus on growth in the delivery of their mandates. Speaking of regulation, it’s good that the government is prepared to reconsider the forthcoming employment regulations – hardly growth-supporting in their current form. A reconsideration of the tax treatment of family firms and non-doms would also make sense, given the changes seem disproportionately punitive, and will further hit investment and employment.
On delivering growth-friendly policy, Spring will see a range of announcements intended to deliver growth-positive policy certainty, including the 10 year Industrial Strategy (probably after the OBR’s Spring forecast update on 26 March, trade strategy too and some announcements to simplify tax administration for smaller companies. IoD members said that the UK’s trade relationship with the EU was the top priority for the government’s first 100 days and that policy instability was the top impediment to growth. June will see delivery of 10 year infrastructure plans as well as the second phase of the Spending Review. But the rise in business costs will impede the growth mission in the near-term. Any action to alleviate those will be helpful.
