Could a few green shoots lift Rishi Sunak’s fortunes?

Is it just me or does it feel like spring is in the air? This could be the week the economy finally sends out some green shoots of recovery. Rishi Sunak will doubtless be relieved by the economic indicators coming his way.

Before we get ahead of ourselves, the caveat. UK plc is hardly off to the races. But January at least finished in the black, with GDP growth of 0.2 per cent. Andrew Bailey, the governor of the Bank of England, has even been moved to opine that the “technical” recession he reported at the end of last year may already be over.

The economic week started with signs of the sun shining on the housing market. Property website RightMove has reported a 1.5 per cent rise in asking prices, a number that outpaced the historic 1 per cent average. The website also reported an uptick in buyer demand, despite what it called the “lacklustre spring budget”, which contained little succour for first-timers struggling to get onto the ladder.

This could be seen as a curtain-raiser for the real business of the week: February’s inflation figure, which will be released by the Office for National Statistics (ONS) on Wednesday.

Last year, Sunak and his chancellor Jeremy Hunt, rather rashly, promised to halve the headline rate, when maintaining price stability is the job of Bank of England’s rate-setting Monetary Policy Committee (MPC). Fortunately for them, the latter was able to bring inflation down through a brutal series of rate rises. Another fall, likely to about 3.5 per cent, will nonetheless have Hunt declaring that “the plan is working”.

Better still for the government is the fact wage growth is comfortably ahead of that figure. The most recent ONS data on the subject is for the year to the end of January. It showed that earnings including bonuses were 5.6 per cent higher, and 6.1 per cent higher when bonuses are taken out. True, wage rises are slowing. Those figures compare with 5.8 per cent and 6.2 per cent for the year to the end of December. However, the phrase “cost of living crisis” can be much more easily countered when pay is comfortably outstripping prices, as it currently is.

All this brings us to the most important event of the week: Thursday’s interest rate decision. If the inflation data was the starter, this is the main course. It is not likely to taste as good.

Rates will almost certainly be held at 5.25 per cent, for a fifth month in a row. This is back-breaking for an economy which, while it is certainly picking up, is still an awfully long way from any sunlit uplands.

A cut would not just be smiled upon by domestic borrowers, struggling under the weight of sharply higher mortgage bills when compared to a couple of years ago. It is of crucial importance to businesses and especially smaller business upon whose shoulders the success or failure of the economy rests.

According to the Federation of Small Businesses, small firms’ views of the availability and affordability of new credit are notably negative. Only around one in seven (14.5 per cent) of those surveyed for the group’s Small Business Index rated it as quite good or very good, while over half (52 per cent) viewed it as either quite or very poor.

The real kicker, however, comes from the rates being offered to those who can get the loans they need. A third (33.4 per cent) said they were offered rates higher than 11 per cent in the final quarter of 2022, representing a new record for the index. In addition, more than 10 per cent reported offers between 8 and 11 per cent, also worse than the previous quarter. Small wonder that small firms and their representatives are crying cut! cut! cut! on the subject of rates.

Their hopes will be dashed. The Bank fears that inflation’s current move towards its 2 per cent target is only temporary. It thinks price rises will pick up again in the second half of 2024.

The most important part of Thursday’s release will come in the construction of the vote and the comments made by the MPC. The City will pore over the latter for any sign of the Bank easing its oft-repeated stance that a cut will only come in the third quarter of the year, and that it will move cautiously from that point onwards.

As for the vote, it bears repeating that at the last meeeting, two members of the MPC actually voted to increase rates by a quarter point, with six supporting no change and one (the ever dovish Swati Dhingra) calling for a quarter point cut. Dhingra will, I think, stick to her guns. But I’m not sure anyone will be joining her. Not yet.

So Sunak shouldn’t expect much springtime sunshine from that quarter. Remember, too, that while the economy is looking a little more hearty than it did last year, it is still more of a tramp steamer than the speedy billionaire’s yacht that it resembled ahead of the 1997 election, when growth approached five per cent. John Major’s government was punished at the polls regardless.

Don’t expect miracles, Rishi.