Treasury fears mounting economic slump is election ‘gift’ for Labour
A double dose of economic bad news this week could worsen Britain’s slowdown in the run-up to the general election, the Government fears.
Figures published on Wednesday are expected to show an uptick in the rate of inflation for the second month in a row.
And on Thursday, official statistics will reveal whether or not the UK slipped into recession last year as interest rates were repeatedly hiked.
Senior Conservatives fear that if both metrics show the economy going backwards, it will be a boost for Labour ahead of two by-elections taking place on Thursday.
But the Treasury is also concerned about the possibility that news of a recession could make it harder to grow in future as consumers cut back on spending in response to their concerns about the state of the economy.
Forecasters believe the rate of inflation in January was 4.1 per cent, up from 4 per cent the previous month after a rise in energy bills. The precise figure will be published today by the Office for National Statistics (ONS).
The ONS has already said that the UK’s economy shrank by 0.1 per cent in the third quarter of 2023, meaning that if the fourth quarter also records negative growth Britain will have met the technical definition of a recession.
Rishi Sunak is expected to argue that inflation remains on course to fall rapidly this year, and that Britain’s weak growth is a result of the need to beat price rises by hiking interest rates.
A Government source said: “Inflation going up, and a recession, is a political gift for Labour. But there are also concerns it could be a self-fulfilling prophecy, because the problem with the economy is that if people think it’s getting worse, they are less likely to spend.”
Independent economists have predicted that inflation will fall in the coming months, possibly reaching its target of 2 per cent by the end of the year – allowing the Bank of England’s monetary policy committee (MPC) to cut inflation by the summer.
Martin Beck of the EY Item Club forecast that “the MPC will start cutting interest rates in May, with a series of further reductions in bank rate following over the course of this year”. Samuel Tombs of Pantheon Macroeconomics said inflation would fall as low at 3.4 per cent this month after the predicted rise for January.
Separate ONS data published on Tuesday showed that wage growth has slowed but remains higher than inflation, meaning that average incomes are increasing in real terms after a two-year squeeze on living standards.
The unemployment rate fell to 3.8 per cent even as the number of vacancies in the job market shrank, suggesting it is becoming easier for employers to find workers.
Jeremy Hunt said: “It’s good news that real wages are on the up for the sixth month in a row and unemployment remains low, but the job isn’t done. Our tax cuts are part of a plan to get people back to work so we can grow the economy – but we must stick with it.”
