Recession ends

Hunt hails return to growth, small firms positive

Jeremy Hunt: the economy is returning to full health

Economic output grew in the first quarter, confirming that the UK recession was short-lived, and signalling a gradual end to the cost of living crisis.

The UK economy grew by 0.6% between January and March, according to official figures. Investors responded by pushing the FTSE 100 up 52.41 points to hit a new record of 8,433.76.

Chancellor Jeremy Hunt hailed the data, which will provide a lift to the Conservatives after another difficult week.

He said: “There is no doubt it has been a difficult few years, but today’s growth figures are proof that the economy is returning to full health for the first time since the pandemic. 

“We’re growing this year and have the best outlook among European G7 countries over the next six years, with wages growing faster than inflation, energy prices falling and tax cuts worth £900 to the average worker hitting bank accounts.”

Rachel Reeves, Labour’s Shadow Chancellor, said: “This is no time for Conservative ministers to be doing a victory lap and telling the British people that they have never had it so good. The economy is still £300 smaller per person than when Rishi Sunak became Prime Minister.”

However, a further positive message came from the small firms sector in Scotland which is at its most upbeat for two years.

The Federation of Small Businesses said its Small Business Index for Q1 2024 reflected increasing consumer expenditure and overall economic growth.

Despite this, it warned of the persistent challenges faced by smaller firms, as many reported decreases in revenue and staffing levels.

More than a third of respondents (34.8%) expect their performance to improve in the next quarter, while less than a quarter (24.1%) believe it will deteriorate.

Andrew McRae, FSB Scotland policy chairman, said: “It is very welcome that we are starting to see the first green shoots of economic recovery, with nearly two in five small businesses in Scotland planning to expand in the coming year.”

Andrew McRae
Andrew McRae: green shoots

Ben Jones, CBI Lead Economist, said:  “Back-to-back increases in output over the first months of this year suggest the UK is now on the road to recovery.

“But a consumer-led recovery could prove short-lived without more determined action to tackle the long-standing problem of weak productivity growth, which ultimately sets the UK’s economic speed limit. 

“Firms want to see action that could help support investment and cut costs which, includes extending full expensing to leased and rented assets, and a business tax roadmap to give firms the certainty and confidence they need to plan ahead and invest in a vibrant UK economy.” 

Interest rate cut ahead

The Bank of England yesterday held interest rates and indicated that a cut is coming, either at its next meeting in June, but possibly in August once it believes inflation has been tamed.

Members of the Bank’s Monetary Policy Committee (MPC) voted by a majority of 7–2 to maintain Bank Rate at 5.25%. It was the sixth consecutive decision to hold.

Swati Dhingra and Dave Ramsden voted to reduce the rate by 0.25 percentage points, to 5%.

Andrew Bailey, governor of the Bank of England said: “We’ve had encouraging news on inflation and we think it will fall close to our 2% target in the next couple of months. 

“We need to see more evidence that inflation will stay low before we can cut interest rates. I’m optimistic that things are moving in the right direction.”

He told a press conference that the “big global shocks” that caused inflation to rise have “faded”.

He added that he expects falling energy prices to show that inflation fell further in April, but warns the Bank will look at the future releases on price rises – there are two before June – “to be sure inflation will fall all the way back to 2% target and stay there.”

The Bank added that “there remains considerable uncertainty around statistics derived from the ONS Labour Force Survey” and “it is therefore more difficult to gauge the evolution of the labour market.”

The Institute of Directors said it was “disappointed” by the Bank’s decision to hold rates, saying that two-thirds of respondents to a survey wanted a cut this month.

“The UK economy remains fragile… [and] inflation is forecast to come down sharply in the coming months,” said Roger Barker, its director of policy. “In our view, these conditions would have justified an early interest rate cut.”

Anna Leach, deputy chief economist, CBI, said the decision to hold rates is in line with the CBI’s expectation that the MPC want to see more evidence that past falls in domestic inflationary pressure are sustainable before they’ll move to cut rates.

“Services inflation and wages data both suggest a cautious approach is warranted. Inflation in the services sector is triple the inflation target and average earnings growth is still running at around double the rate consistent with the inflation target.  

IFSD Glasgow
Inflation in the services sector is rising at three times target (pic: Terry Murden)

“It is noteworthy that the Bank judge that demand growth is going to run behind supply growth over the next couple of years. Overall, today’s release does not change our view that the first rate cut is most likely to be in August.”

Jeremy Batstone-Carr, European strategist at Raymond James Investment Services, said that since the MPC’s last meeting, headline and core inflation have dipped, with the descending trend expected to continue.

“April’s CPI data on May 22 is expected to show that price increases have fallen sharply, laying the ground for rate cuts the following month,” he said.

“Although the labour market has shown signs of loosening, providing additional encouragement to the MPC, the possible inflationary consequences of a rate cut remain concerning to some the rate-setters.

“The committee thus remains divided on the road ahead, with some finding that the pace of deflation is still too slow for comfort.”

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