Rachel Reeves might be able to exaggerate her CV but there’s no massaging the state of the economy.
We’re in the eye of the storm; a false calm; growth is flat and the labour market is stagnant – but are things about to take a serious turn for the worse?
Earlier this week official labour market statistics showed that things are pretty stagnant – unemployment remained relatively unchanged between October and December, in much the same way that economic growth remained flat over the same period.
It’s telling that these economic indicators were presented as good news for the Chancellor; she’d dodged a recession in December and it seems that employment held up towards the end of last year…but that holding pattern masks a pretty worrying reality, one that I fear is about to burst into view.
With each passing day, the government’s insistence that economic growth is its “number one priority” sounds more and more offensive.
Last week, the Business Secretary, Jonathan Reynolds, said he believes that “good policy, good strategies, and good government working hand-in-hand with the private sector, can make a difference.”
This may be true, but it’s also the case that bad policy, poor strategies and muddled government leads to business confidence crashing to the lowest recorded level in a decade.
Firms plan to slash headcount
The Chartered Institute of Personnel and Development (CIPD) spoke to 2,000 firms and painted a miserable picture for the start of this year, with just over a third of employers planning to reduce headcount over the coming months either through redundancies or by pulling the plug on planned recruitment.
North of 40 per cent of firms said they will raise prices, a figure rising to nearly 70 per cent in the retail sector. The CIPD said “these are the most significant downward changes in employer sentiment they’ve seen in the last ten years, outside of the pandemic.”
How’s that for good policy?
Also released at the start of this week, the latest Federation of Small Businesses confidence survey made for grim reading, with economic conditions and the burden of taxation cited as the main barriers to growth among their members, with sectors including hospitality, retail and construction offering the gloomiest outlook.
At the end of last summer 17 per cent of small businesses said they were going to reduce their headcount; by December that figure had surged to 33 per cent.
None of this can be dismissed as the result of geopolitics or trade wars – those shocks loom on the horizon – instead, it’s domestic UK policy and the Chancellor’s own choices that are having such a devastating effect.
The latest consumer confidence data released today confirms the outlook:
It’s slumped again, with Brits’ outlook on the state of the economy dropping for the fifth month in a row. Public expectations for the economy over the next three months worsened in February, down from a low base in January. Even Gen Z, traditionally the most upbeat generation on the economy and their own finances, saw a drop off in optimism.
Inflation rears its ugly head
Behind all this data lurks the stuff of a Chancellor’s nightmares: inflation – and data this week show’d it’s rearing its ugly ahead once again.
Coming in at 3 per cent for the month of January the figure was up from 2.5 per cent December and higher than traders had been expecting.
Inflation is now at its highest rate since March last year.
Economists identified one of the main contributing factors as the imposition of VAT on private school fees – so the policy hurts everyone, not just those who pay to educate their kids.
The outlook isn’t good, either – with April’s hike in the minimum wage and additional National Insurance contributions driving many firms to raise prices.
Two thirds of CFOs told the Bank of England they will be hiking costs with much of this passed on directly to consumers – something that’s unlikely to tame the inflation already lurking in the economy.
If inflation is a blow for Rachel Reeves it’s a headache for the Bank of England, who hadn’t expected the figure to spike as much as it did, posing questions about the path ahead for rate cuts.
There’s a simple truth behind all of this that shouldn’t be forgotten – all the current problems in the economy – from looming job cuts to higher prices have their origins in the government’s Budget of October last year. They set the path we’re on.