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The economy remained in reverse gear during October, according to official figures covering the month ahead of the government’s first budget.

The Office for National Statistics (ONS) said output fell 0.1% following the 0.1% decline recorded for the previous month.

It marked the first time since the COVID pandemic that the economy had shrunk for two consecutive months.

The figures showed zero growth in the powerhouse services sector, with manufacturing and construction declining at a pace of 0.6% and 0.4% respectively.

Economists had expected a positive headline figure.

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The data adds to the picture of a far more jittery economy during the second half of the year, in the wake of the general election.

Critics blame the government, accusing Sir Keir Starmer and his chancellor Rachel Reeves of a spectacular, early, own goal that spooked the public and businesses alike.

After three weeks in office, both warned of a “tough” budget to come on 30 October due to an inherited “£22bn black hole” in the public finances that a snap Treasury review had uncovered.

There has been strong evidence since then of a hit to sentiment as a result of the warning in data covering things like consumer spending and wage awards.

SLOWING ECONOMY MAY BOLSTER PACE OF RATE CUTS



Gurpreet Narwan

Business and economics correspondent

@gurpreetnarwan

The economy is now 0.1% smaller than it was before Labour came to power.

It’s been almost six months but the new government is yet to deliver on its promise to turbocharge economic growth.

The chancellor will today urge the public to be patient with her. The message will be: It will take a lot longer than six months to revive an economy that has been stagnating for a decade.

How confident should we be in her plan? On the one hand, falling inflation and interest rates should provide a more fertile environment for consumer spending and business investment.

The government’s plan to increase public investment should also boost demand in the economy and, if successful, lead to longer term sustained growth.

Yet, there are a number of risks. A big increase in business taxes next year will weigh on employment and growth.

Pubs, restaurants and retailers are already stagnating and that was before they reacted to the budget, which at the end of the month slapped them with a big increase in employers’ national insurance contributions..

The latest figures show output in consumer-facing services fell by 0.6% in October 2024, following growth of 0.4% in September 2024. Manufacturing also shrank by 0.6% as, across the economy, businesses went in ‘wait and see’ mode ahead of the budget. The risk is they didn’t like what they saw in the budget.

Then there is Trump and the risk of tariffs. Britain could escape the worst of the cross hairs but we will have to wait and see. If things go against us, it’s very possible that the Bank of England could soon start worrying more about weak growth than inflation, possibly a prelude – as we’ve seen in Europe – to a faster pace of interest rate cuts.

The economy, which had been the fastest-growing in the G7 between January and June, grew by 0.1% during the third quarter of the year.

Economists had been expecting a similar performance in the final three months of 2024 following a budget that largely spared working people additional pain but put businesses and those of wealthier means on the hook for extra taxes.

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CBI chief’s approach to budget tax shock

Business has since accused the chancellor of hurting the very working people she wants to protect as measures, such as higher employer National Insurance contributions, will only lead to weaker pay growth, fewer jobs and higher prices as additional costs are passed on.

Employers also argue that the extra tax burden, along with tougher employee rights legislation, will hurt investment at a time when Labour has prioritised growth in the economy.

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HMV owner slams budget ‘burden’

Ms Reeves said the figures were “disappointing”, but defended the budget.

She said: “We have put public finances back on a stable footing, capped the rate of corporation tax at the lowest level in the G7, established a £70bn National Wealth Fund to drive growth in our towns and cities, launched a 10-year infrastructure strategy and are creating pension mega funds to boost investment in British businesses, infrastructure and clean energy.”

The chancellor added: “We are determined to deliver economic growth as higher growth means increased living standards for everyone, everywhere.”

Mel Stride, the shadow chancellor, said: “It is no wonder businesses are sounding the alarm.

“This fall in growth shows the stark impact of the chancellor’s decisions and continually talking down the economy.”

He went on to say that Labour was left “the fastest growing economy in the G7”, adding: “Because of their decisions, growth is now under serious pressure.

“The impact will be felt by families through higher taxes, fewer jobs, higher prices and higher interest rates.”

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The government has shifted the growth emphasis to the public sector through a jump in investment in services such as the NHS.

Ms Reeves is borrowing more to help fund that and insists the budget was a one-off to help fix pressing problems that were unfunded by her predecessor.

The Bank of England has said that the reaction of business to the budget tax hikes is its main area of concern when judging the prospects for inflation and economic growth.

Financial markets are expecting four interest rate cuts next year but no change when policymakers meet for the final time in 2024 next week.

Commenting on today’s figures Yael Selfin, chief economist at KPMG UK, said: “October activity was held back by uncertainty ahead of the budget, with consumer and business confidence near recent lows.

“The fourth quarter could see a weaker pace of growth, as businesses come to terms with the higher tax burden announced at the budget as well as rising geopolitical uncertainties.

“Nevertheless, we expect higher public spending to lift GDP growth next year, with lower interest rates providing some boost to private sector demand.”

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Post Office to unveil £1.75bn banking deal with big British lenders

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Post Office to unveil £1.75bn banking deal with big British lenders

The Post Office will next week unveil a £1.75bn deal with dozens of banks which will allow their customers to continue using Britain’s biggest retail network.

Sky News has learnt the next Post Office banking framework will be launched next Wednesday, with an agreement that will deliver an additional £500m to the government-owned company.

Banking industry sources said on Friday the deal would be worth roughly £350m annually to the Post Office – an uplift from the existing £250m-a-year deal, which expires at the end of the year.

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The sources added that in return for the additional payments, the Post Office would make a range of commitments to improving the service it provides to banks’ customers who use its branches.

Banks which participate in the arrangements include Barclays, HSBC, Lloyds Banking Group, NatWest Group and Santander UK.

Under the Banking Framework Agreement, the 30 banks and mutuals’ customers can access the Post Office’s 11,500 branches for a range of services, including depositing and withdrawing cash.

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The service is particularly valuable to those who still rely on physical cash after a decade in which well over 6,000 bank branches have been closed across Britain.

In 2023, more than £10bn worth of cash was withdrawn over the counter and £29bn in cash was deposited over the counter, the Post Office said last year.

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A new, longer-term deal with the banks comes at a critical time for the Post Office, which is trying to secure government funding to bolster the pay of thousands of sub-postmasters.

Reliant on an annual government subsidy, the reputation of the network’s previous management team was left in tatters by the Horizon IT scandal and the wrongful conviction of hundreds of sub-postmasters.

A Post Office spokesperson declined to comment ahead of next week’s announcement.

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Trump trade war: How UK figures show his tariff argument doesn’t add up

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Trump trade war: How UK figures show his tariff argument doesn't add up

As Chancellor Rachel Reeves meets her counterpart, US Treasury secretary Scott Bessent to discuss an “economic agreement” between the two countries, the latest trade figures confirm three realities that ought to shape negotiations.

The first is that the US remains a vital customer for UK businesses, the largest single-nation export market for British goods and the third-largest import partner, critical to the UK automotive industry, already landed with a 25% tariff, and pharmaceuticals, which might yet be.

In 2024 the US was the UK’s largest export market for cars, worth £9bn to companies including Jaguar Land Rover, Bentley and Aston Martin, and accounting for more than 27% of UK automotive exports.

Little wonder the domestic industry fears a heavy and immediate impact on sales and jobs should tariffs remain.

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Chancellor’s trade deal red lines explained

American car exports to the UK by contrast are worth just £1bn, which may explain why the chancellor may be willing to lower the current tariff of 10% to 2.5%.

For UK medicines and pharmaceutical producers meanwhile, the US was a more than £6bn market in 2024. Currently exempt from tariffs, while Mr Trump and his advisors think about how to treat an industry he has long-criticised for high prices, it remains vulnerable.

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The second point is that the US is even more important for the services industry. British exports of consultancy, PR, financial and other professional services to America were worth £131bn last year.

That’s more than double the total value of the goods traded in the same direction, but mercifully services are much harder to hammer with the blunt tool of tariffs, though not immune from regulation and other “non-tariff barriers”.

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How US ports are coping with tariffs

The third point is that, had Donald Trump stuck to his initial rationale for tariffs, UK exporters should not be facing a penny of extra cost for doing business with the US.

The president says he slapped blanket tariffs on every nation bar Russia to “rebalance” the US economy and reverse goods trade ‘deficits’ – in which the US imports more than it exports to a given country.

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That heavily contested argument might apply to Mexico, Canada, China and many other manufacturing nations, but it does not meaningfully apply to Britain.

Figures from the Office for National Statistics show the US ran a small goods trade deficit with the UK in 2024 of £2.2bn, importing £59.3bn of goods against exports of £57.1bn.

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Add in services trade, in which the UK exports more than double what it imports from the US, and the UK’s surplus – and thus the US ‘deficit’ – swells to nearly £78bn.

That might be a problem were it not for the US’ own accounts of the goods and services trade with Britain, which it says actually show a $15bn (£11.8bn) surplus with the UK.

You might think that they cannot both be right, but the ONS disagrees. The disparity is caused by the way the US Bureau of Economic Analysis accounts for services, as well as a range of statistical assumptions.

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“The presence of trade asymmetries does not indicate that either country is inaccurate in their estimation,” the ONS said.

That might be encouraging had Mr Trump not ignored his own arguments and landed the UK, like everyone else in the world, with a blanket 10% tariff on all goods.

Trade agreements are notoriously complex, protracted affairs, which helps explain why after nine years of trying the UK still has not got one with the US, and the Brexit deal it did with the EU against a self-imposed deadline has been proved highly disadvantageous.

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Public failed by water regulators and government as bills rise, spending watchdog says

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Public failed by water regulators and government as bills rise, spending watchdog says

Water regulators and the government have failed to provide a trusted and resilient industry at the same time as bills rise, the state spending watchdog has said.

Public trust in the water sector has reached a record low, according to a report from the National Audit Office (NAO) on the privatised industry.

Not since monitoring began in 2011 has consumer trust been at such a level, it said.

At the same time, households face double-digit bill hikes over the next five years.

The last time bills rose at this rate was just before the global financial crash, between 2004-05 and 2005-06.

Regulation failure

All three water regulators – Ofwat, the Environment Agency and Drinking Water Inspectorate – and the government department for environment, food and rural affairs (Defra) have played a role in the failure, the NAO said, adding they do not know enough about the condition or age of water infrastructure and the level of funding needed to maintain it.

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Since the utilities were privatised in 1989, the average rate of replacement for water assets is 125 years, the watchdog said. If the current pace is maintained, it will take 700 years to replace the existing water mains.

A resident collects water at bottle station at Asda, Totton.
Pic: PA
Image:
The NAO said the government and regulators have failed to drive sufficient investment into the sector. File pic: PA

Water firms have grappled with leaky pipes and record sewage outflows into UK waterways in recent years, with enforcement action under way against all wastewater companies.

Despite there being three regulators tasked with water, there is no one responsible for proactively inspecting wastewater to prevent environmental harm, the report found.

Instead, regulation is reactive, fining firms when harm has already occurred.

Financial penalties and rewards, however, have not worked as water company performance hasn’t been “consistent or significantly improved” in recent years, the report said.

‘Gaps, inconsistencies, tension’

The NAO called for this to change and for a body to be tasked with the whole process and assets. At present, the Drinking Water Inspectorate monitors water coming into a house, but there is no entity looking at water leaving a property.

Similarly no body is tasked with cybersecurity for wastewater businesses.

As well as there being gaps, “inconsistent” watchdog responsibilities cause “tension” and overlap, the report found.

The Environment Agency has no obligation to balance customer affordability with its duty to the environment when it assesses plans, the NAO said.

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Thames Water boss can ‘save’ company

Company and investment criticism

Regulators have also been blamed for failing to drive enough funding into the water sector.

From having spoken to investors through numerous meetings, the NAO learnt that confidence had declined, which has made it more expensive to invest in companies providing water.

Even investors found Ofwat’s five-yearly price review process “complex and difficult”, the report said.

Financial resilience of the industry has “weakened” with Ofwat having signalled concerns about the financial resilience of 10 of the 16 major water companies.

Most notably, the UK’s largest provider, Thames Water, faced an uncertain future and potential nationalisation before securing an emergency £3bn loan, adding to its already massive £16bn debt pile.

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Water businesses have been overspending, with only some extra spending linked to high inflation in recent years, leading to rising bills, the NAO said.

Over the next 25 years, companies plan to spend £290bn on infrastructure and investment, while Ofwat estimates a further £52bn will be needed to deliver up to 30 water supply projects, including nine reservoirs.

A "Danger" sign is seen on the River Thames, on the day data revealed sewage spills into England's rivers and seas by water companies more than doubled last year, in Hambledon, Britain, March 27, 2024. REUTERS/Dylan Martinez
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The NAO said regulators do not have a good understanding of the condition of infrastructure assets

What else is going on?

From today, a new government law comes into effect which could see water bosses who cover up illegal sewage spills imprisoned for up to two years.

Such measures are necessary, Defra said, as some water companies have obstructed investigations and failed to hand over evidence on illegal sewage discharges, preventing crackdowns.

Meanwhile, the Independent Water Commission (IWC), led by former Bank of England deputy governor Sir Jon Cunliffe, is carrying out the largest review of the industry since privatisation.

What the regulators and government say?

In response to the report, Ofwat said: “The NAO’s report is an important contribution to the debate about the future of the water industry.

“We agree with the NAO’s recommendations for Ofwat and we continue to progress our work in these areas, and to contribute to the IWC’s wider review of the regulatory framework. We also look forward to the IWC’s recommendations and to working with government and other regulators to better deliver for customers and the environment.”

An Environment Agency spokesperson said: “We have worked closely with the National Audit Office in producing this report and welcome its substantial contribution to the debate on the future of water regulation.

“We recognise the significant challenges facing the water industry. That is why we will be working with Defra and other water regulators to implement the report’s recommendations and update our frameworks to reflect its findings.”

A Defra spokesperson said: “The government has taken urgent action to fix the water industry – but change will not happen overnight.

“We have put water companies under tough special measures through our landmark Water Act, with new powers to ban the payment of bonuses to polluting water bosses and bring tougher criminal charges against them if they break the law.”

Water UK, which represents the water firms, has been contacted for comment.

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