The UK economy is likely to see no growth in the aftermath of the Chancellor’s Budget, the Bank of England has warned, as businesses respond to record tax measures by increasing prices and reducing staffing levels.
Policymakers now anticipate the economy will flatline in the final quarter of 2024, a notable downgrade from their previous forecast of 0.3% growth. This comes after figures showed output shrinking in October, prompting concerns that a recession may be on the horizon.
Although the Bank’s Monetary Policy Committee (MPC) voted on Thursday to maintain interest rates at 4.75%, Governor Andrew Bailey indicated that the path ahead remains uncertain. He stressed that the Bank is not in a position to commit to future rate cuts just yet, given the lingering uncertainties following the Chancellor’s maiden Budget.
Analysts have cautioned that households and businesses could face further cost pressures into 2025, leading to a challenging combination of subdued growth and persistent inflation.
A Bank of England survey suggests that a growing proportion of households now expect stagnant economic conditions to become the norm. “There was a common view that the UK was moving from a cost-of-living crisis to a prolonged period of higher costs and lower living standards,” the report noted.
Firms appear to be responding to the Chancellor’s decision to raise employers’ National Insurance contributions by £25bn with moves that could keep inflation higher for longer. Many are choosing to push up prices rather than cut wages, while also scaling back on recruitment and working hours.
The Prime Minister acknowledged that improving living standards “will take some time” and “won’t be fixed by Christmas.” Meanwhile, the Chancellor stood by the Government’s commitments and insisted that low-income families are already feeling the benefit of recent measures.
However, the Bank’s survey painted a more cautious picture. Some households felt that official commentary on economic stabilisation and inflation nearing 2% did not match their lived experience, with many saying their day-to-day costs remain high.
The Bank of England added that the increase in National Insurance is “weighing heavily on sentiment” among businesses, dampening their optimism about the speed and scale of any potential recovery. Consumers’ concerns have also extended to the property market, where the Bank observed that buyers are increasingly reluctant to make major financial commitments amid the current economic climate.
Economists at Citi suggested that several factors, including planned price increases next year, could keep inflation levels stubbornly high. HSBC analysts said the outlook has left investors seeing the UK as drifting towards stagflation, potentially justifying higher interest rates even if growth slows and unemployment rises.
Minutes from the MPC’s latest meeting revealed differing views among policymakers about the Budget’s long-term impact on economic growth. Three of the nine members favoured an immediate cut in interest rates, but the majority, including Governor Bailey, voiced concern that inflationary pressures remain too uncertain to allow a quick shift in policy.
Market expectations currently lean towards a possible rate cut in February, but Mr Bailey made clear that any move to reduce borrowing costs would be gradual. “We must ensure we meet the 2% inflation target on a sustained basis,” he said, adding that the Bank remains cautious given the heightened level of uncertainty.
Businesses themselves expressed surprise at the extent of the National Insurance rise, particularly the reduction in the threshold at which employers begin to pay. Many anticipate that this will push up total labour costs, especially in sectors reliant on part-time or lower-paid staff.
In response, some firms are considering investment in automation or even moving operations abroad, as they seek to mitigate the impact of rising costs and maintain competitiveness in an increasingly challenging environment.
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Budget ‘weighing on growth’, warns Bank of England