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Chancellor Rachel Reeves has said she is “not satisfied” with the performance of the UK economy after it grew a meager 0.1 per cent in the three months to the end of September.
Economists had expected 0.2 percent growth over the period, which in itself is not a stellar performance, and comes after 0.5 percent growth over the previous three months.
The growth figure is a problem because of the government's dependence on a growing economy to collect more taxes.
A growing economy means more profits for businesses and higher personal incomes, which in turn increases income for HM Revenue & Customs, which will help pay for improving the NHS and other services Ms Reeves says she wants .
But his recent budget may have dampened the spending appetite of households and businesses, both before and after the event.
Danni Hewson, of stockbroker AJ Bell, said: “Household jitters about the budget put a damper on consumer behavior and although the retail sector recovered somewhat in September, people were being cautious, especially as It was about those nice personal investments like haircuts and manicures.”
Change in retail prices
To clean up government finances, Ms Reeves raised taxes on employers in the form of Employer National Insurance, despite warnings that doing so could depress wages. Large employers, including retailers and pub chains, have said prices could rise as a result.
“For businesses, the specter of higher taxes was already pushing many businesses to take a wait-and-see approach when it came to investment and hiring plans. The big question is what will happen to those plans now that the dust has settled and the numbers have been crunched,” Ms Hewson said.
The budget is only part of it, and other factors, such as the additional costs associated with Brexit, also cool spending habits.
Ben Jones, chief economist at the Confederation of British Industry, agreed that uncertainty ahead of the Budget “probably played a role”, after businesses reported a slowdown in spending decision-making.
Another thing to keep in mind is the small nature of the move over a three-month period in the broader context of the economy.
Luke Bartholomew, deputy chief economist at investment giant Abrdn, said it's “possible this simply represents normal monthly volatility rather than something more fundamental.”
The move is unlikely to upset Ms Reeves' spending plans, which include a 4.7 per cent rise in NHS and education spending, plus £2.9bn for defense and £1.3bn for councils. .
Bank of England interest rates
Weaker growth may tempt the Bank of England to cut interest rates to reduce borrowing costs and give businesses and mortgage holders more money to spend on other things.
But this is unlikely, according to Suren Thiru, director of economics at the Institute of Chartered Accountants of England and Wales, at least in the short term.
Banking policymakers “will likely be sufficiently concerned about inflationary risks from the Budget and rising global headwinds to resist approving consecutive interest rate cuts.”
Companies hiring new staff
Sanjay Raja, chief economist at Deutsche Bank in the UK, said: “The road ahead remains bumpy.”
He added that the tax increases could hit business spending before Labour's own spending plans start to take effect in 2025.
This could mean less hiring of new staff and spending on equipment and other services.
“We see growth picking up a little towards the end of the year. And we still see positive momentum through 2025,” he said.
“But downside risks are brewing. “Geopolitical risks are rising with the specter of a trade war looming.”
Liz McKeown, director of economic statistics at the ONS, said some sectors such as retail and construction performed well, but added: “Overall, growth was moderate in most industries in the latest quarter.”
