UK GDP – growth stalls and Budget uncertainty looms 

UK GDP – growth stalls and Budget uncertainty looms

Rob Morgan, Chief Investment Analyst at Charles Stanley Direct, part of Raymond James

“The UK economy started the year with decent momentum, but there are now signs that the promising start is fading. With the consequences of the conflict in the Middle East still unfolding an inflationary pulse could squeeze household finances and knock growth further off course.

What is the outlook for UK growth?

“A hot, football-fuelled summer has accelerated consumer spending and provided a short-term reprieve for many businesses, especially those in hospitality pushed to the brink by higher labor and energy costs. Yet with the jobs market softening and households carrying the scars of past price shocks, autumn could carry a sting in the tail.

“The step up in the energy price cap, higher borrowing costs and the possibility of more energy market disruption could weigh as the year progresses. Meanwhile, the approach of what stands to be a seismic autumn Budget could undermine business and consumer confidence.

What does the weak economy mean for households?

“For many households, the concern is a persistent squeeze that gradually erodes financial resilience. The combination of slow growth and elevated prices creates the sense that people are having to run harder simply to stand still.

“Many households have seen wages rise in recent years, but much of that gain has been absorbed by higher living costs. Sluggish growth combined with renewed inflation pressures makes it harder to improve living standards, build reserves or get ahead financially. For families who have only recently rebuilt savings depleted during previous inflation shocks, it’s a case of back to square one.

“Despite the weak growth environment, the scope for interest rate cuts to relieve the pressure on mortgage holders and other borrowers remains limited. The Bank of England is not in a position loosen its stance as inflation pressures have built up in the system and may take months to fully alleviate.

Autumn Budget looms large

“The prospect of a major fiscal event under a new government adds another layer of uncertainty. A Burnham government that inherits weak growth and stretched public finances has only a limited menu of options to balance the nation’s books in the short term: higher taxes, spending restraint, greater borrowing, or some combination. Households may become increasingly cautious if they fear future tax rises are the dish of the day.”

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