The UK economy is unlikely to see growth in the wake of the Chancellor’s Budget, the Bank of England has warned, as companies respond to record tax measures by raising prices and cutting workforces.
Policymakers now expect the economy to flatten in the final quarter of 2024, a notable downgrade from their previous forecast of 0.3% growth. This comes after figures showed output fell in October, raising concerns that a recession may be on the horizon.
Although the Bank’s Monetary Policy Committee (MPC) voted on Thursday to keep interest rates at 4.75%, Governor Andrew Bailey indicated the road ahead remains uncertain. He stressed that the Bank is not yet in a position to implement future interest rate cuts, given the ongoing uncertainties following the Chancellor’s first budget.
Analysts have warned that households and businesses could face further cost pressures in 2025, leading to a challenging combination of subdued growth and persistent inflation.
A Bank of England survey shows that a growing proportion of households now expect stagnant economic conditions to become the norm. “There was a general view that Britain was moving from a cost of living crisis to a prolonged period of higher costs and lower living standards,” the report said.
Businesses appear to be responding to the Chancellor’s decision to increase employer National Insurance contributions by £25 billion, with measures that could keep inflation high for longer. Many are choosing to raise prices rather than cut wages, while at the same time cutting hiring and working hours.
The Prime Minister acknowledged that improving living standards will “take some time” and “won’t be solved before Christmas”. Meanwhile, the Chancellor stood by the government’s commitments and emphasized that low-income families are already experiencing the benefits of recent measures.
However, the Bank’s research painted a more cautious picture. Some households felt that official commentary on economic stabilization and inflation near 2% did not reflect their experiences, while many said their daily costs remain high.
The Bank of England added that the national insurance increase is “heavily weighing on sentiment” among businesses, dampening their optimism about the speed and scale of any recovery. Consumer concerns also extended to the real estate market, where the Bank found that buyers are becoming increasingly reluctant to make large financial commitments in the current economic climate.
Economists at Citi suggested that several factors, including planned price increases next year, could keep inflation stubbornly high. Analysts at HSBC said the outlook has investors seeing the UK sliding into stagflation, potentially justifying higher interest rates even as growth slows and unemployment rises.
The minutes of the MPC’s last meeting showed that there are differing views among policymakers on the long-term impact of the budget on economic growth. Three of the nine members supported an immediate rate cut, but the majority, including Governor Bailey, expressed concern that inflationary pressures remain too uncertain to allow for a quick policy change.
Market expectations are currently leaning 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 that we achieve the 2% inflation target on a sustainable basis,” he said, adding that the Bank remains cautious given the increased level of uncertainty.
Companies themselves expressed surprise at the scale of the increase in National Insurance, particularly the lowering of the threshold at which employers start paying. Many expect this to increase overall labor costs, especially in sectors that rely on part-time or lower-paid staff.
In response, some companies are considering investing in automation or even moving their operations abroad as they look to mitigate the impact of rising costs and maintain competitiveness in an increasingly challenging environment.