Budget uncertainty has gone but odds have been stacked against business
If Rachel Reeves thought certainty would cure the UK economy’s growth problem, she was wrong. She’s just pitted consumers against retailers.
This data-heavy week has reflected that uncertainty over the Budget has not been cured by policy which heaps pressure on business.
We’ve had inflation rising, debt compounded, inheritance tax receipts soaring, farmers protesting, the private sector contracting for the first time in a year, retail sales falling, but consumer confidence rising before the so-called ‘golden quarter’.
What does it all mean?
Inflation
Earlier in the week, inflation rose back above the Bank of England’s two per cent target, to 2.3 per cent in October.
This was driven by higher energy bills, with Ofgem hiking its price cap on household bills by 9.5 per cent last month.
On Friday, Ofgem said the price cap would go up in January to £1,738, putting more pressure on households.
AJ Bell investment director Russ Mould, said: “UK households look set to face increased pressure thanks to higher energy bills in January with an increase in the energy price cap which could be bad news for consumer-facing businesses if it dampens Britons’ appetite to spend.”
Sanjay Raja of Deutsche Bank added that its “suite of underlying inflation trackers paints a mixed picture for October.”
While core CPI and services CPI ticked higher, the Bank’s preferred core services measures all saw big falls in the month.”
Our own weighted median and trimmed mean CPI measures, however, ticked higher. And our measure of domestic inflation was flat on the month.”
The inflation data “points to no big change in the underlying inflation story, particularly with lingering uncertainties around future price dynamics.”
In other words, when you dig into it, it’s not that bad for consumers.
So why is everyone worrying?
Retailers’ cry for help
Following the inflation data, Bank of England governor Andrew Bailey weighed in, commenting on the British Retail Consortium’s letter to the Chancellor.
Bailey warned about job losses and price rises as a result of measures in the Budget, such as the hike to employers national insurance (ENI).
The boss of Lidl also said this week that retailers were “reeling” as a result of the Budget, with the industry facing a £7bn hit from measures like (ENI).
“There will be more pressure on firms’ margins” but they would “probably rebuild those profit margins over time”, Bailey said.
Even a 24 per cent fall in insolvencies this week was met with caution. Analysts suggested figures may have more to do with falling rates than the general health of the economy, in addition to warning on customer spending and business investment in the coming months.
It’s not exactly what retail wants to hear just before the so-called ‘golden quarter’ including Black Friday and Christmas.
Consumers get a boost, for now
Retail has sounded the alarm, but what about consumers?
Well, they’re in a Budget sandwich.
The GfK survey found that consumer sentiment rose in November post-Budget – as the ONS reported that retail sales had dropped by 0.7 per cent in October, in the run up to the Budget.
All five measures of consumer confidence rose, although major purchase intentions led the pack with a five-point jump, ahead of the Golden Quarter.
“There was evidence of nervousness in recent months as consumers contemplated the potentially worrying impact of the UK Budget at home,” Neil Bellamy, consumer insights director at GfK, said.
Raja said about rebounding confidence, that “although the retail data surprised to the downside, other data published.. showed that the dip in consumer sentiment ahead of the budget seems to be partly unwinding.”
“Looking at the components of the survey, consumers reported an improving financial and economic situation, improved appetite for major purchases and lower saving intentions.”
AJ Bell’s Russ Mould added the ONS “data shows retailers saw worse than expected sales in October as further evidence emerged of the impact downbeat messaging ahead of the Budget had on consumer confidence.”
With inflation now above the Bank’s target, and the golden quarter set to boost spending; traders have reined in their bets on fast interest rate cuts, with markets now pricing in a ten per cent chance of a Christmas cut and as few as three cuts next year.
“While we think the Bank of England will continue to cut rates in 2025, the pace of rate cuts is expected to be slower than previously anticipated, and rates may stay elevated for longer,” NIESR associate economist Monica George Michail said.
A contracting economy
The week was topped off, with bleak news in the latest S&P ‘flash’ purchasing managers’ index (PMI) survey, which came in at 49.9 in November, now below the neutral 50.0 threshold. This is down from 51.8 last month, and the lowest since October 2023.
Chris Williamson, chief business economist at S&P Global Market Intelligence, said: “The first survey on the health of the economy after the Budget makes for gloomy reading.
“Businesses have reported falling output for the first time in just over a year while employment has now been cut for two consecutive months.”
He said output and hiring downturns were “marked contrasts” to the “robust growth” of the summer months, amid “deepening concern about prospects for the year ahead”, while the survey indicated the economy “slipping into a modest decline”.
“Business optimism has slumped sharply since the general election, dropping further in November to hit the lowest since late 2022.
Companies are giving a clear ‘thumbs down’ to the policies announced in the Budget, especially the planned increase in employers’ National Insurance contributions
Danni Hewson, AJ Bell head of financial analysis, said: “Retailers had already sounded the alarm, expressing concern that pre-Budget jitters were denting consumer confidence and that would-be shoppers were putting off spending decisions just in case their finances took an unexpected hit.
On the rise in employers national insurance, Hewson said “many understood that increased taxes on their employers would ultimately impact their financial lives and warnings now being issued by business after business that the raised NI would result in lower wage increases and job losses seem to bear that out.”
Hewson added, “there remain concerns that rising inflation and a tightening labour market will push consumers to tighten their purse strings again.”
The end of Budget uncertainty may have given a boost to consumer confidence in the short term, but that’s not going to last, or be enough to turn the UK economy around.
The odds are currently stacked against retail and business, and when they struggle more, they will try to pass on these tax rises to consumers.
This means prices will go up, more jobs will go, inflation will go up and consumers will ultimately end up buying less, or paying more.
No amount of Christmas and Black Friday spending is going to solve this, there needs to be a better equilibrium between shoppers and shops.