Labour Contends With Flood of Bad Economic Data Since New Year
(Bloomberg) -- The start of Labour’s first full year in power has been marked by an avalanche of bad economic news that is unsettling both businesses and households, and will reinforce the government’s determination to push for growth.
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In the last week, key surveys have shown confidence among consumers and bosses is flagging, jobs are being lost and private sector activity is stagnating. Government borrowing has also overshot forecasts, making it harder for Chancellor of the Exchequer Rachel Reeves to respond.
The recent run of miserable data follows a torrid fortnight at the start of the year, when financial markets lost confidence in the government’s economic plans and briefly drove UK borrowing costs up by more than other major economies. The position has since reversed.
Reeves will next week address those economic concerns with a major speech on growth. In an interview with Bloomberg at Davos this week, she said growth was the government’s “number one mission,” eclipsing net zero. In the same interview, Business Secretary Jonathan Reynolds said the public hasn’t realized how “resolved” Labour’s new cabinet is to make controversial decisions for the good of the economy.
Tax Hikes
The backdrop to the chancellor’s speech is bleak, with businesses and households increasingly worried about the impact of her £40 billion ($49.7 billion) tax raid in October, the second biggest revenue-raising budget on record. Around £26 billion of that was a payroll levy on employers.
Confidence among manufacturers fell at the fastest pace in two years in January, according to a survey published this week by the CBI employers’ group. Private sector activity scarcely grew in January and firms slashed jobs at the fastest pace since the wake of the financial crisis, according to S&P Global’s composite purchasing managers’ index.
Its finding was published shortly after J Sainsbury Plc, the country’s second-largest grocer, announced 3,000 roles would go — including a 20% reduction in senior management — and that all of its remaining in-store cafes will close. Overall, the PMI index edged up to 50.9, just in growth territory.
Economists say retailers and hospitality firms are the most likely to lay off staff as their profit margins are already tight and they will be unable to absorb Labour’s tax rises. Deloitte’s survey of chief financial officers this week also showed business optimism at a two-year low.
Consumer Gloom
Households are similarly gloomy, despite one of the best years on record for real-terms pay. Consumer confidence tumbled to the lowest since before Labour returned to power. GfK said Friday that its key sentiment gauge slipped five points to minus 22 in January, the weakest since the end of 2023.
Paul Dales, chief UK economist at Capital Economics, said: “It makes sense that households are picking up on the relatively gloomy outlook. They are aware that businesses pay their wages so the effect of higher taxes is coming down the pipe to them.”
Households are “choosing to save more” rather than spend their pay rises, he added. The GfK survey also showed that consumers are more pessimistic about their financial prospects, with fewer prepared to splash out on big-ticket items and more saving as a precaution. Expectations for the economy over the next 12 months were the worst in almost two years.
Separate surveys this week by British Retail Consortium and S&P underscored the gloomy consumer sentiment. Official GDP figures last week showed that the economy has shrunk since Labour came to power in July.
Dales cautioned against taking the sentiment data too literally. “These measures tend to overshoot and the economy does not perform as badly as suggested.” Reeves this week pointed to a survey of global business leaders by the consultancy PwC that showed the UK is the second most attractive country for investment behind the US.
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