While Keir Starmer has been entertaining the French prime minister, Emmanuel Macron, on his state visit to the UK, things have been going horribly wrong. The latest issue? The economy has shrunk yet again – for the second month on the trot.
May was when things were supposed to get back on track after a nasty contraction in April. Instead, UK plc continued in the red, with the Office for National Statistics (ONS) reporting a 0.1 per cent shrink. Now, that is an improvement from the previous month (which saw a 0.3 per cent decline), but the consensus forecast called for a return growth of 0.1 per cent.
Remember all that boasting from No 11 about how UK plc was rocketing to the top of the G7 in the first quarter? Oops... The cabinet away day to discuss the forthcoming Budget may be less cheery than first anticipated.
April’s economic woes were caused by the unwinding of the flurry of activity in the first three months of the year, to get exports in ahead of Donald Trump’s tariffs. The hangover from that is clearly sticking around for much longer than forecasters feared. Manufacturing was a notable weak spot in May, shrinking by 0.9 per cent, but construction also contributed to the doom and gloom, with a 0.6 per cent decline. The dominant service sector grew – just about, at 0.1 per cent – but that wasn’t nearly enough to rescue the numbers.
The latter might have been better but for the fact that the consumer was in a slough of despond. Retail sales, sports activities, amusement parks and travel were all solidly in the red.
The most recent update on the labour market showed wages continuing to outpace inflation, but settlements have started to decline and unemployment is rising. People are beginning to worry about their jobs, and that means thinking twice about spending.
But perhaps I’m overstating the case.
For example, I read that the average spend on the summer’s run of Oasis shows comes to something like £800, once you tot up the costs for hotels, travel, food, clothes and all the merch. Perhaps – just perhaps – people have just been saving their pennies for a blowout or two like that?
For those desperately in need of some more concrete cheer, I can oblige. There is no need to worry about the dreaded “r-word” – recession. Remember, you must have two consecutive three-month quarters in the red to meet the technical definition, and while Q2 is proving a dud, Q3 (the current one) is shaping up to be better. The forward-looking business surveys certainly suggest as much.
June’s edition of the closely watched S&P composite purchasing managers’ index (PMI), for example, was revised up to 52, with anything above 50 indicating growth. The composite, which came in at 50.7 in May, combines the results of the individual surveys of services, manufacturing and construction, and suggests that UK plc has found a shot of espresso. Forthcoming missives from the ONS should reflect that.
The Bank of England cutting interest rates at its next meeting – governor Andrew Bailey has lately been dropping hints – will further help.
But a tax-raising Budget will do the opposite. The problem for Rachel Reeves, Starmer, and the rest of them is that while the economy is expected to return to growth, it has booked its seats on the slow train and doesn’t seem to be changing its plans. The government needs things to move a lot faster than expected to ease the fiscal jam it is in. Cue lots of head-scratching at that away day.
When it comes to pulling UK plc out of its long-term funk, there are no easy answers. It doesn’t help that Starmer and his government have been lurching from crisis to crisis – all this leaving his administration in the deeply uncomfortable position of hunting for a handful of economic magic beans.
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