Figures showing tentative economic growth suggests Rishi Sunak’s economic plan is beginning to work but it is too soon for tax cuts, Treasury sources have said.
Government insiders welcomed signs the economy inched further away from a recession on Thursday as data shows a cautious bounce-back in growth.
Gross domestic product (GDP) rose by 0.2 per cent in August, compared to a 0.6 per cent drop in July, the Office for National Statistics said. The July figure was also revised down from a 0.5% fall on Thursday.
Asked if this means the Government’s economic plan is working, a Treasury source said it “of course, welcome news, given many predicted recession this time last year”.
But they stressed that Chancellor Jeremy Hunt and the Prime Minister would not stray away from tight fiscal rules in order not to risk the target of having inflation by the end of the year.
“It demonstrates there’s underlying resilience in the British economy. But we’re not complacent and determined to maintain fiscal discipline to reduce inflation as quickly as possible,” they said.
Treasury sources ruled out any change tax policy as a result of the GDP figures.
“PM and Chancellor want to lower personal tax burden, but inflation reduction is the priority right now,” they said.
The end of some industrial action was partly to blame for some of the economic recovery, as well as a boost in specific industries with a boost for the architectural and engineering sector.
The education sector, which had shrunk 1.7 per cent due in part to strikes in July, rose by 1.6 per cent. But the arts, entertainment and recreation sector shrank by 7.4 per cent.
It puts the UK one step closer to avoiding a recession this year and could also indicate positive news around interest rates next month.
The Bank of England could be more likely to keep interest rates unchanged at 5.25 per cent when its decision makers meet next month due to the tentative nature of the growth. A sudden spike may have caused them to reconsider and hike rates further.
The news comes two days after the International Monetary Fund forecast the UK would have the weakest economic growth in the G7 next year due to pressure from higher interest rates.
A Treasury source argued that the UK “almost always” outperforms the IMP forecasts and said recent revisions from the ONS had not been factored in, pointing to the fact the stats authority now says the UK saw the third fastest recovery in the G7 from the pandemic through to the end of 2021.
“Since 2020 we have grown faster than France and Germany. Since 2010, the UK has secured the fastest growth of any major European economy,” they said.
Chancellor Mr Hunt said: “The UK has grown faster than France and Germany since the pandemic and today’s data shows the economy is more resilient than expected.
“While this is a good sign, we still need to tackle inflation so we can unlock sustainable growth.”
Labour shadow chancellor Rachel Reeves said: “Under the Conservatives, Britain’s economy remains trapped in a low growth, high tax cycle that is leaving working people worse off.
“Labour will get our country building again so we can boost growth, make working people better off and get Britain’s future back.”