As the curtains draw to a close on 2024, the economic horizon for the United Kingdom appears increasingly clouded, with British firms bracing for a sharp decline in business activity in the new year. The latest growth indicator survey from the Confederation of British Industry (CBI) paints a sobering picture, suggesting that companies are preparing to reduce hiring and cut output over the first quarter of 2025.
Weakest Growth Expectations Since November 2022
The CBI’s poll of 899 companies, conducted between November 25 and December 12, revealed that expectations for growth have plummeted to their lowest levels since the chaotic aftermath of Liz Truss’s brief tenure as prime minister in November 2022. This widespread pessimism spans across sectors, with the service sector anticipating a decline in activity and manufacturers forecasting a sharp drop in output in the first three months of 2025.
Budget Measures Exacerbate Challenges
Chancellor Rachel Reeves’ decision to raise £25bn by increasing employers’ national insurance contributions (NICs) in her October budget has left businesses scrambling to mitigate the impact. While Reeves maintains that the additional funds are necessary to address the “black hole” in public finances inherited from her predecessors, she has acknowledged that the move may result in lower wage increases. Critics argue that the tax hike could ultimately cost jobs, further compounding the challenges faced by British firms in an already tepid demand environment.
Consumer Spending Squeeze Looms
Separate data released by the British Retail Consortium on Monday suggests that retailers are poised to face an additional blow in the new year. Consumer spending forecasts have fallen by six points, impacting nearly every retail category. Helen Dickinson, chief executive of the BRC, warned, “If these expectations are realised, retailers could find themselves facing a new year spending squeeze just as they unveil their January sales.”
Inflation and Interest Rates Weigh on Growth
The past week has brought a series of troubling economic data for the government as it strives to reignite growth. The CBI’s industrial trends survey revealed that total orders at UK factories collapsed in December to the lowest level since the peak of the Covid pandemic in 2020. Meanwhile, the Bank of England, as it maintained interest rates at 4.75% last Thursday, projected that UK growth would flatline in the final quarter of the year, following a rise in inflation to an eight-month high of 2.6% on Wednesday.
Analysts caution that a dramatic economic slowdown, coupled with rising borrowing costs since the budget, could undermine government finances and force Reeves to further increase taxes. City economists predict that the recent inflation surge will compel the Bank to keep interest rates elevated, potentially weighing on household spending and hampering the government’s growth plans.
Trade War Risks on the Horizon
As if domestic challenges were not enough, the spectre of a trade war with the United States looms large following the inauguration of Donald Trump in January. The president-elect has already threatened the EU with tariffs on exports to the US, a move that could be extended to include the UK. Such a development would deal a severe blow to the government’s growth aspirations.
Calls for Government Action
In light of the grim economic outlook, the CBI is urging the government to take decisive action to boost confidence and encourage investment. The business organisation has called for long-overdue reforms to the apprenticeship levy, increased occupational health incentives to support workforce health, and a comprehensive overhaul of the business rates system.
Firms are looking to the government to boost confidence and to give them a reason to invest, whether that’s long overdue moves to reform the apprenticeship levy, supporting the health of the workforce through increased occupational health incentives, or a reform of business rates.
– CBI statement
Government Defends Track Record
Responding to the growing concerns, Commons leader Lucy Powell defended the government’s economic track record on Sunday. While acknowledging the public’s disappointment with the state of the economy, Powell emphasised that Labour’s inheritance meant that substantial changes would take time.
A Treasury spokesperson highlighted the difficult decisions made in the budget to fix the economy and address the £22bn “black hole” inherited by the government. The spokesperson underscored the measures taken to support businesses, including:
- Capping corporation tax at the lowest rate in the G7
- Providing 40% business rates relief for 250,000 properties in the coming year
- Launching a 10-year infrastructure strategy
- Creating pension mega funds to boost investment in British businesses, infrastructure, and clean energy
- Establishing a National Wealth Fund to catalyse over £70bn in investment to drive growth
As 2025 dawns, the UK economy finds itself at a critical juncture. The path ahead appears fraught with challenges, from dampened business activity and hiring to rising inflation and the spectre of trade disputes. The government’s ability to navigate these treacherous waters and implement effective policies will be crucial in determining whether the UK can weather the storm and emerge with a brighter economic outlook on the other side.
