Britain’s economy showed no growth during the first three months of Prime Minister Keir Starmer’s administration, raising concerns about the country’s economic trajectory as it enters a period of potential stagnation. Official data released on Monday by the Office for National Statistics (ONS) revealed that the nation’s GDP for the July-to-September period had been revised down to 0.0%, from an initial estimate of 0.1%. Additionally, the ONS lowered its growth estimate for the second quarter of 2024 to 0.4%, down from a previous forecast of 0.5%.

Since Keir Starmer’s Labour Party took power in early July, the government has grappled with an economy that appears to be faltering under the weight of ongoing inflationary pressures, international trade challenges, and internal demand issues. While Starmer and Finance Minister Rachel Reeves have been vocal about the poor state of the economy, their immediate response has been to introduce tax increases for businesses through the October budget. However, this move has alarmed many employers, who now face an uncertain future amid falling business confidence and rising costs.

The new figures have raised further doubts about the government’s ability to turn the economy around in the short term. Analysts warn that the UK could face a prolonged period of stagnation, with some predicting no growth at all in the final quarter of 2024. The Bank of England, which has struggled to balance interest rates in the face of inflationary pressures, also echoed these concerns in its latest forecast, projecting zero growth in the fourth quarter of 2024. Despite this, the central bank chose to hold borrowing costs steady, citing the ongoing risks posed by inflation.

One of the primary drivers behind the weak economic performance is a reduction in demand for British exports, which has led to slower growth in key sectors. However, consumer spending and business investment at home have been more resilient, helping to prop up the economy. “Our hunch is that 2025 will be a better year for the economy than 2024,” said Paul Dales, Chief UK Economist at Capital Economics, suggesting that a recovery could be on the horizon, albeit after a difficult year.

The economic slowdown has placed pressure on the UK government’s fiscal strategy. Analysts have pointed to a growing risk that the country may fall into a recession, defined as two consecutive quarters of negative growth. Philip Shaw, Chief Economist at Investec, noted that while the UK economy was narrowly avoiding a recession, the data raised the possibility of the Bank of England cutting interest rates as early as 2025. Meanwhile, business confidence has continued to deteriorate, with a survey from Lloyds Bank showing that business sentiment had fallen to its lowest point of 2024 in December. Data from the Confederation of British Industry (CBI) also painted a bleak picture for the future, with companies anticipating lower output and higher prices in the early months of 2025.

Alpesh Paleja, an economist with the CBI, warned that the economy was heading for what he called the “worst of all worlds.” His comments reflected the growing pessimism among businesses, which are now preparing for reduced output, lower hiring levels, and stubborn inflationary pressures. Moreover, the government’s decision to hike social security contributions for employers has added to the burden, exacerbating weak demand and contributing to the worsening business outlook.

In response to these challenges, Rachel Reeves has emphasized the need for long-term sustainable growth, despite the immediate economic difficulties. “This data shows the scale of the challenge we face after 15 years of neglect,” she said, referring to the previous Conservative government’s handling of the economy. Reeves has argued that her budget will lay the foundation for future prosperity, although her plans to raise taxes on businesses have been met with resistance from industry leaders who argue that the government’s fiscal policies risk deepening the economic slowdown.

The Conservative opposition, for its part, has called on the Labour government to rethink its proposed tax hikes, which are set to take effect in April 2025. Mel Stride, the Conservatives’ spokesperson on the economy, warned that any delay in addressing the issue would only exacerbate business concerns, undermine economic recovery, and harm employment levels. The Conservative Party has consistently opposed Labour’s approach, arguing that the government should prioritize cutting taxes and reducing regulations to stimulate growth and restore business confidence.

Sectoral performance data from the ONS further revealed the weaknesses in the economy. The services sector showed no growth during the third quarter, with some of the weakest-performing industries including bars and restaurants, legal services, and advertising. Construction, on the other hand, saw a modest 0.7% increase, while production fell by 0.4%. These mixed results reflect the broader challenges facing the UK economy, where some sectors are still struggling to recover from the effects of the pandemic and Brexit.

The data also highlighted the lack of progress in improving living standards, with households drawing down on savings to maintain consumption. This has placed additional pressure on the government, which had hoped to see a recovery in household spending as a driver of growth. Despite this, the current account deficit, which measures the gap between the UK’s imports and exports, did show improvement, shrinking to £18.1 billion in the third quarter from £24 billion in the previous quarter.

The UK’s economic performance under Keir Starmer’s new government has been disappointing, with the country struggling to generate growth in the face of a challenging global environment and domestic pressures. While there is hope for a recovery in 2025, the immediate future remains uncertain, and the government’s fiscal policies will be crucial in shaping the country’s economic trajectory. As Britain faces an uphill battle to regain momentum, business confidence and strategic fiscal planning will be key to avoiding further stagnation and ensuring long-term stability.

(Adapted from Investing.com)

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