Can Rachel Reeves save Britain’s frozen economy from recession?

Jack Frost swept an icy chill across the UK economy earlier than anyone expected. Following on from last week’s grim economic news, the Office for National Statistics (ONS) has revised its third quarter (July to September) estimate of GDP growth down to absolute zero.

It wasn’t exactly looking warm and fuzzy when the bean counters made their first stab at the number: a tepid 0.1 per cent growth. But now we have learned that the service sector did worse than had been thought, and while construction showed a little life, manufacturing contracted. As if that wasn’t enough, the second (April to June) quarter was also revised down from growth of 0.5 per cent to 0.4 per cent.

I was initially nervous about using the R word: recession. You must have two consecutive quarters in negative territory to satisfy the criteria. But with another zero expected for the current quarter, the UK is teetering on the brink.

Another downward revision to the third quarter – perfectly possible – combined with the fourth undershooting the current (low) expectations and the box will be ticked. Some economists believe we are already there.

The CBI added to the midwinter gloom with a warning that the first part of 2025 probably isn’t going to be any better. At minus 24, the business group’s “growth indicator” is at its lowest level in two years.

The group also said private sector activity fell again in the three months to December, and at a faster pace than in the three months to November (minus 21 per cent against minus 13 per cent). Activity, it moaned, has been flat or falling since August 2022.

No prizes for guessing who’s copping the flak; and some of the brickbats being aimed at 11 Downing Street are deserved.

In her response to the figures showing that there has been no growth since she took office, the chancellor gave us a repeat of what she has said before but with some added guff about “fuelling our fire to deliver for working people” and the “neglect” of the last lot. Yes, yes... but you’re in the driver’s seat now so what are you going to do about it?

“The Budget and our Plan for Change will deliver sustainable long-term growth, putting more money in people’s pockets through increased investment and relentless reform,” Ms Reeves said.

Trouble is, the decision to demand that business, the engine of growth, do nearly all the work when it comes to providing the cash she needs by hiking employer national insurance contributions (NICs) – a tax on jobs – at a time when the economy was already showing signs of cooling, has sent it straight into the freezer.

It is good that Reeves is thinking of the long term, which is something governments have consistently failed to do. She deserves credit for that. The trouble is that she now faces an immediate crisis of her own making. Her spending decisions were based on the assumption that the economy will improve next year. Those expectations are blowing up like the Death Star at the end of a Star Wars movie.

If the economy continues to undershoot, Reeves will have to further raise taxes, cut spending, or break her (self-imposed) borrowing rules. None of those represent good options.

Britain’s business community has been fond of complaining, but with the economy very obviously in trouble some help is necessary.

Interest rates are expected to fall again in February, but the chancellor can’t afford to rely on getting much of a boost from monetary policy. Indeed, the Bank has warned that her Budget may lead to higher rates over the long term.

The CBI’s alert that “price growth expectations are getting firmer” is the sort of thing that will have members of the Bank’s rate-setting Monetary Policy Committee hiding behind the sofa after pressing “pause” on the interest rate remote.

With firms also expecting to reduce both output and hiring, the business group warned that the economy faces “the worst of all worlds”. It seems unlikely that the consumer can be relied upon to help, so it is really only Reeves who can pull the economy out of its trough.

A change in tone wouldn’t hurt. It is quite possible to talk the economy down and the government did that during the pre-Budget softening-up process. The CBI has asked for business rate reform and, well, good luck with that. They’ve been talking about it for years now. Supporting the health of the workforce through “increased occupational health incentives”? Worth a try.

Reform of the apprenticeship levy is something that could be tackled, not least because it is failing to produce decent apprenticeships in its current form.

Otherwise, buckle up. We’re reduced to crossing our fingers for an early thaw.