UK economy exits recession as interest rates held

The UK economy grew by 0.6% between January and March, according to figures from the Office for National Statistics (ONS).

It means that the country has officially emerged from recession with growth led by the services sector.

Production also grew while the construction sector shrank.

It follows the Bank of England’s decision to hold interest rates at 5.25% for the sixth month in a row.

The Bank signalled that rate cuts should follow later this year.

Ben Jones, Lead Economist at the Confederation of British Industry, said: ‘Back-to-back increases in output over the first months of this year suggest the UK is now on the road to recovery. With falling inflation boosting households’ spending power, as well as opening the way for a reduction in interest rates in the months ahead, the economy should be able to sustain some momentum through the year.

‘But a consumer-led recovery could prove short-lived without more determined action to tackle the long-standing problem of weak productivity growth, which ultimately sets the UK’s economic speed limit. 

‘Firms want to see action that could help support investment and cut costs which, includes extending full expensing to leased and rented assets, and a business tax roadmap to give firms the certainty and confidence they need to plan ahead and invest in a vibrant UK economy.’

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New customs rules cause confusion and uncertainty

The new customs checks and charges that came into force on 1 May are causing confusion and uncertainty for business, warns the British Chambers of Commerce (BCC).

The second phase of the UK’s Border Target Operating Model introduced charges of up to £145 for imports of plant and animal products. 

It is the first time for decades that firms will have to pay such fees for EU imports of goods arriving in Great Britain.

There is uncertainty around which consignments are subject to checks, due to issues with border computer systems.

Government figures show the UK imports just under 30% of all the food it consumes from the EU. 

William Bain, Head of Trade Policy at the BCC, said: ‘Firms face mounting confusion and uncertainty about exactly how and when the borders checks and costs will be fully implemented. It is crucial for business and trade that the government gives clarity on what is happening.

‘The government should immediately exclude firms in the trusted trader scheme from these charges which would give many smaller businesses some relief. But in the long-term, these checks and costs should be done away with by reaching an agri-food deal with the EU, something we have consistently called for. 

‘With interest rates still high, inflation well above its 2% target and supply chain disruption continuing to build, these costs and uncertainty are the last thing firms need.’

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UK economy will see slowest growth in G7 next year

The UK will see the slowest growth of the G7 nations next year, the Organisation for Economic Co-operation and Development (OECD) has warned.

OECD forecasts show that UK GDP will rise by just 1% in 2025, well below predictions for other G7 nations.

The OECD said that economic growth in the UK will also be ‘sluggish’ this year.

It expects the UK economy to grow by 0.4% this year, downgraded from its previous prediction of 0.7%. According to the OECD, only Germany will see slower economic growth this year.

Certain measures ‘could help to lower fiscal pressure’, the OECD said, outlining the government cuts to National Insurance and its Tax-Free Childcare (TFC) scheme as being potentially beneficial.

However, the OECD said that any increase in public spending should happen only after interest rates have been lowered. It predicted that the Bank of England will reduce the cost of borrowing from 5.25% to 3.75% by the end of next year.

The OECD report said: ‘Fiscal prudence is required as inflation remains above target, and spending is to be directed towards supply enhancing investment, including infrastructure, the National Health Service, and adult skills

‘Proceeding with the childcare reform will help tackle economic inactivity, but requires contingent planning to address potential bottlenecks, in particular likely staff shortages.’

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Interest rate decision prolongs uncertainty for firms, warns BCC

The Bank of England’s decision to hold interest rates at 5.25% prolongs the period of uncertainty for firms, warns the British Chambers of Commerce (BCC).

The Bank’s Monetary Policy Committee (MPC) voted by eight to one to hold the base rate at 5.25%, the fifth month in a row that it has stayed at that level.

The Bank said that the recent falls in the rate of inflation were ‘encouraging’ but that it needs to be certain that inflation will fall to its 2% target and stay there before making cuts to rates.

David Bharier, Head of Research at the BCC, said the decision to hold rates was widely expected.

He added: ‘However, it prolongs the period of uncertainty for firms grappling with high borrowing costs.

‘While [the] inflation data showed a further easing, most small businesses know that the economy remains fragile. The interest rate is itself a driver of inflation, as housing, rental, and borrowing costs continue to rise.

‘Our most recent forecast expects some cuts to the base rate going forward, potentially falling to 4.5% by the end of the year. But in the meantime, businesses need reassurance from policymakers that there is a clear plan to drive much needed economic growth.’

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UK economy returns to growth

The UK’s economy returned to growth in January, according to the latest data from the Office for National Statistics (ONS).

The economy grew by 0.2% during the first month of 2024 following a fall in output during the previous month.

The economy was boosted by stronger sales in shops and online and more construction activity in January.

The ONS said the services sector led the bounce back after retailers struggled to draw in shoppers in December.

David Bharier, Head of Research at the British Chambers of Commerce (BCC), said: ‘Today’s data, showing an estimated 0.1% decline in GDP in the three months to January, is further evidence that the UK economy remains in a precarious state.

‘However, estimated growth of 0.2% in January may indicate the 2023 technical recession is over.

‘Businesses are clear about the factors that are holding back growth – high inflation, high interest rates, skills shortages, a lack of infrastructure investment and trade barriers with the EU.

‘Last week’s Budget saw some positive measures for businesses, including an increase to the VAT registration threshold. However, the statement was not a game changer and the UK stills lacks a clear industrial strategy to unlock long-term growth.’

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UK fell into recession at the end of 2023

The UK economy fell into recession during the final three months of last year, according to the Office for National Statistics (ONS).

GDP dropped by 0.3% during the fourth quarter of 2023, which was a sharper fall than expected. That follows a 0.1% fall between July and September.

The UK is considered to be in recession if GDP falls for two successive three-month periods – or quarters.

The figure for the final three months of last year was worse than a 0.1% fall widely forecast by financial markets and economists.

According to the ONS, there a slowdown in all the main sectors it measures to determine the health of the economy, including construction and manufacturing.

Alex Veitch, Director of Policy and Insight at the British Chambers of Commerce, said: ‘Businesses were already under no illusion about the difficulties they face, and this news will no doubt ring alarm bells for Government. 

‘The BCC’s last Quarterly Economic Forecast suggests annual growth below 1.0% for the next two years as firms remained gripped by uncertainty and the twin perils of high inflation and interest rates remain.?? 

‘The Chancellor must use his Budget in just under three weeks’ time to set out a clear pathway for firms and the economy to grow. 

‘Businesses are crying out for a long-term economic plan that reduces the cost pressures they are facing and unlocks the investment they so sorely need.’ 

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Interest rates stay at 5.25%

UK interest rates have been left unchanged at 5.25% by the Bank of England.

It is the fourth time in a row the Bank has held rates after previously raising them 14 times in succession as it attempted to bring inflation down.

The Bank also published its inflation report, which predicts that inflation will fall back to its target of 2% between April and June this year, before rising again.

Anna Leach, Deputy Chief Economist at the Confederation of British Industry (CBI), said the decision would come as a relief to businesses and households.

She said: ‘While inflation is following a downward trend towards the 2% target, it’s not clear whether rates will follow suit. Relatively high wage inflation alongside an uptick in services inflation in December means that a rate cut before the summer is increasingly unlikely to materialise.

‘However, that won’t stop pressure piling onto the Bank of England to reduce rates as weakness in the economy persists. A rebound in growth in November following the previous month’s decline is encouraging but masks the overall picture of a flatlining economy, still at risk of technical recession.

‘The stakes are high for business bearing the brunt of higher borrowing costs and soft demand. They desperately need certainty on monetary policy alongside a package of measures from government to kickstart productivity and growth.’

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Chancellor suggests taxes may be cut in Spring Budget

Chancellor Jeremy Hunt has hinted that he may cut taxes in the upcoming Spring Budget.

Speaking at the World Economic Forum’s annual meeting in Davos, Switzerland, the Chancellor stated: ‘In terms of the direction of travel we look around the world and we note that the economies growing faster than us in North America and Asia tend to have lower taxes, and I believe fundamentally that low-tax economies are more dynamic, more competitive and generate more money for public services like the NHS.

‘That’s the direction of travel we would like to go in but it is too early to say what we are going to do.’

The Chancellor used the 2023 Autumn Statement in November to slash national insurance thresholds by 2%.

Although the Chancellor did not comment on which taxes he might cut, experts predict Mr Hunt will focus on income tax in the Spring Budget. Tax cuts are more likely if inflation falls and interest rates are reduced.

The Chancellor will present the Spring Budget on Wednesday 6 March. 

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Cost of student loan system ‘has increased by more than £10 billion’, IFS finds

Research carried out by the Institute for Fiscal Studies (IFS) has revealed that the cost associated with financing the UK’s student loan system has increased by more than £10 billion per year.

The IFS attributes the increase to higher interest rates and changes in government borrowing over the past two years.

It said that funding student loans has become ‘substantially more expensive’ for the government, and its official measures of the cost of student loans do not reflect the increase.

The business group said that if the government can borrow at a lower interest rate than the interest it charges on student loans, then lending money to a student who subsequently repays their loan in full will prove to be a profitable transaction for the government.

In its report, the IFS stated: ‘In recent years, the government’s borrowing costs have always been lower than the interest rates it charged on student loans. This is now expected to change.

‘Yields on gilts (government bonds) have risen substantially over the past two years and are now higher than expected RPI inflation, which will determine the interest rate on newly issued student loans. As a result, as well as making a loss on the loans that are not repaid, the government can now also expect to make a loss on the loans that are.’

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UK inflation rate falls to 3.9%

Data published by the Office for National Statistics (ONS) has revealed that the UK’s inflation rate fell to 3.9% in the year to November.

The fall was bigger than the ONS had anticipated, and lower petrol prices contributed to the reduction in the inflation rate.

Price increases for bread and cakes are also easing, according to the ONS. The fall in inflation has piled pressure on the Bank of England to cut interest rates faster.

Responding to the figures, Chancellor Jeremy Hunt stated that the UK is ‘back on the path to healthy, sustainable growth’. However, he also acknowledged that families are struggling with the ongoing cost-of-living crisis, and said that the government ‘will continue to prioritise measures that help with cost-of-living pressures’.

Commenting on the data, David Bharier, Head of Research at the British Chambers of Commerce (BCC), said: ‘Today’s data showing the CPI rate grew at 3.9% in November, a greater slowdown than expected, is welcome confirmation that the headline rate of inflation is continuing to ease. However, prices are still rising from a very high base following multiple economic shocks and core CPI remains stubborn at 5.1%.

‘Persistent inflation and high interest rates are likely to remain a barrier to business growth for some time to come. Businesses are desperate for a clear, long-term plan for growth which sets out a vision for infrastructure, skills and green innovation.’

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