Rachel Reeves needs a “Christmas miracle” to boost Britain’s growth, economists have warned after new data showed GDP flatlined during the Government’s first three months in power.
The Chancellor admitted she faces a “huge” battle to improve the economic picture in light of the latest figures from the Office for National Statistics (ONS).
UK GDP registered zero growth in the third quarter of this year, worse than the original estimate of 0.1 per cent. GDP per capita fell by 0.2 per cent, and real disposable income was flat.
Prime Minister Keir Starmer has made increasing real disposable income a key performance target for his government.
Reeves said in response: “The challenge we face to fix our economy and properly fund our public finances after 15 years of neglect is huge. But this is only fuelling our fire to deliver for working people. 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.”
The figures date to the period between July and September, mostly after Labour took power but before the Budget was delivered in late October.
Economists said that while the Government did not bear all the responsibility for the sluggish growth, it would need to act to avoid further stagnation which would harm the public finances as well as squeezing living standards.
But it follows a Bank of England forecast last week of zero growth for the final quarter of this year, warning that higher costs imposed on businesses – such as national insurance contributions made in the Budget, leave the future path of GDP and inflation more uncertain – meaning it is not clear when interest rates will next be cut.
Paul Dales of Capital Economics told The i Paper: “Reeves should hope for a Christmas miracle because if current trends continue, she may have to cut spending or raise taxes to prevent her fiscal rule from being broken.
“To be fair to Reeves, probably only a small part of the stagnation in the second half of last year is due to the Budget. Instead, more of it is probably a result of the lingering drag from high interest rates and the weakness in overseas demand. Even so, when it comes to the economy, the Government has been slow out of the blocks and it will need to work hard to catch up.”
Michael Saunders of Oxford Economics called for “a proper plan for growth”, warning that the Budget “did not do much to boost growth either near term or long term”.
Bangor University economist Ed Jones added: “Reeves is in a difficult situation because if the economy underperforms she will need to increase taxes or cut back on services.”
And Stephen Millard, deputy director of the National Institute of Economic and Social Research, blamed the flatlining growth on “a large fall in consumer confidence”, saying: “The rise in national insurance contributions (NICs) and the national living wage represent a large increase in costs for firms and so are both likely to weigh down on growth in 2025, with the NICs increase also likely to weigh down on job creation leading to a rise in unemployment.”
Conservative shadow Chancellor Mel Stride said: “Having inherited the fastest growing economy in the G7, growth has tanked on Labour’s watch. That means greater pressure on our public finances and an economy which, far from becoming more secure, is becoming significantly more vulnerable.”
In a potential boost to the Government, ONS data also showed that business investment is increasing. A Downing Street spokesman said: “There is far more work to do, and that is why the Government has set out an ambitious plan to get the economy going.”
Reeves is expected to make a major speech on the economy next month in which she will outline a fresh set of policies to try and boost growth.
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