United Kingdom economic growth is showing signs of slowing

Source: Economic Daily

On September 23, participants walked inside the Liverpool Exhibition Centre in United Kingdom, where the annual meeting of the Labour Party was held. Photo by Xinhua News Agency reporter Li Ying

Data from the United Kingdom Office for National Statistics showed that after zero month-on-month growth in United Kingdom's real gross domestic product (GDP) in June, real GDP growth continued to stagnate in July, slower than economists' previous expectations of 0.2%. United Kingdom Chancellor of the Exchequer Rachel ·Reeves said the performance of July's economic data made her clearly aware of the serious challenges facing the United Kingdom economy, and blamed the Conservative government for leaving a "mess" of 14 years of stagnant economic growth, and that the Labour government could not let change happen "overnight".

The release of the monthly statistics is the first economic report card since the new Labour government led by United Kingdom Prime Minister Starmer came to power on July 4. Ahead of the release of the data by the National Bureau of Statistics, economists generally believed that the slowdown in June was temporary and caused by political uncertainty in the run-up to the election. But for now, monthly economic performance shows that the United Kingdom economy has deviated from the modest growth trajectory that began at the end of 2023 and will go down the path of growth in the second half of 2024. The Bank of England had forecast that United Kingdom economic growth was expected to be 0.4% in the third quarter, with a further slowdown to 0.2% in the fourth quarter.

Specific economic data showed that total output in the services sector rose 0.1% in real terms in July, compared with a 0.1% decline in June. The biggest driver of growth in the services sector in July came from the information technology and communications sector, which saw a 0.8% increase in monthly output, mainly driven by economic activities such as computer programming, IT consulting, and AI. Wholesale and retail trade also showed positive month-on-month growth, with economic output in the wholesale trade sector rebounding after falling 1.1% in June to 0.7% in July. Meanwhile, retail sales bucked the trend and rose 0.5% in July after falling 1.2% in June, with total non-food sales (department stores, clothing, home furnishings, etc.) rising 1.4% month-on-month. The rebound in retail growth was largely due to seasonality, with most retailers saying sales were boosted by the summer discount season and European football matches.

The manufacturing sector in the production sector fell by 1.0% month-on-month in July, which was the main reason for the decline in the total output of the entire production sector, and the decline in output in the manufacturing sector was increased by the manufacturing of transportation equipment (-2.3%). According to the United Kingdom Motor Manufacturers and Traders Association (SMMT), United Kingdom car production fell by 14.4% in July, mainly due to the transition of car production lines to electric vehicles and temporary difficulties in the global supply chain. As of July this year, United Kingdom car exports fell by 14.3% month-on-month, and exports to major markets such as the European Union, United States and China all declined, reflecting the global competitive challenges faced by United Kingdom car companies. SMMT chief executive Harves said that in fact, as the auto industry reorganizes electrification and transitions to zero-emission vehicle production, volatility in United Kingdom car production and exports is likely to persist. United Kingdom automakers need to seize every opportunity to improve their global competitiveness in order to drive a recovery in vehicle production. At the same time, the United Kingdom needs healthy markets, cheaper green energy, and seeks to establish more efficient trade agreements to support easier integration of United Kingdom automakers into the global market.

Inflation data released by Statistics United Kingdom on September 18 showed that United Kingdom inflation remained stable in August, with the consumer price index (CPI) rising unchanged from 2.2% in July. Meanwhile, the United Kingdom's closely tracked services price index (the core indicator of upward pressure on domestic price levels in the United Kingdom) rose to 5.6%, slightly higher than economists' previous expectations of 5.5% and up from 5.2% in July, led by higher air transport prices, suggesting upward pressure on inflation remains. Despite recent data showing stagnant aggregate output growth and a slowdown in wage growth in the United Kingdom, core inflation remains firm, which will have a significant impact on the Bank of England to cut rates, making it more difficult for the Bank of England to further ease monetary policy restrictions in the near term, slowing the pace of rate cuts. Another factor influencing the decision to cut rates is the disappointing performance of the United Kingdom economy in July, which provides reasonable support for rate cuts, and the stagnation of economic growth may prompt the United Kingdom central bank to ease monetary policy faster and more sharply in the second half of the year. With the combination of two opposing dynamics, the central bank's path to rate cuts is more uncertain, which means that it cannot make the decision to cut rates as quickly as the Fed does.

The market is expecting the United Kingdom autumn budget to support economic growth. Disappointing economic data in July means that the slowdown in the second half of the year may be more severe than expected, and growth forecasts for the third quarter will be revised sharply downward. The market believes that in order to increase the confidence of companies to grow and invest, companies need predictable and efficient tax systems and policies that support growth. The upcoming Labour government's autumn budget must send a strong, positive message of growth. Starmer and Reeves have put growth at the heart of Labour's agenda, but the autumn budget will likely include "painful" options such as tax hikes. Reeves said after taking office as Chancellor of the Exchequer that the current government had inherited a £22bn public finance deficit from the previous Conservative government. As the fall budget approaches, the prospect of tax hikes has made consumers more uneasy, and consumers have become more cautious about spending in the second half of the year. While Starmer recently insisted that next month's budget would not contain any measures to curb economic growth, and saw stabilizing public finances as a prerequisite for economic growth, it ruled out policy increases in value-added tax, income tax and national insurance premiums. However, the market still expects the Labour government to reform the tax system and raise capital gains tax, inheritance tax and energy tax.

In the long run, investment will continue to be needed to support economic growth. Recently, the Organisation for Economic Co-operation and Development (OECD) said that the United Kingdom government needs to consider tax reform and an increase in the upcoming government budget. According to the Financial Times, eight economists recently warned the Labour government that if the Labour government inherits an "austerity" fiscal policy, i.e. reducing government investment spending as a percentage of GDP, it will repeat the previous Conservative Party's long-term stagnation in economic growth. United Kingdom's chronic lack of public investment has led to a vicious cycle of stagnation and recession, with low investment not only leading to economic weakness and difficulty in improving labour productivity, but also serious social and environmental problems. The Labour government has pledged an additional £4.7bn a year on energy and the green transition, but this will still lead to a decline in net public sector investment as a share of GDP. According to the United Kingdom Institute for Fiscal Studies (IFS), government investment in the United Kingdom will be around 1.7% of GDP by fiscal year 2029-2030, down from 2.5% projected in the latest year. Economists warn that cutting investment in the name of fiscal prudence will hurt the economic foundation, while calling on the United Kingdom government to further increase the budget, expand public sector borrowing, establish a long-term, sustainable government investment framework, avoid budget "short-term thinking", and unlock the potential of the United Kingdom's long-term economic growth by expanding sustainable investment. (Source of this article: Economic Daily Author: Ma Pianyu)