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Optimism in UK Economy Sinks to Lowest Level Since Truss Fallout

Commuters pass the Bank of England (BOE) in the City of London, UK, on Wednesday, Aug. 2, 2023. Speculation is growing the Bank of England will surprise economists by signaling an increase to the pace of bond sales as it looks to reduce its outsized footprint in the market. Photographer: Chris Ratcliffe/Bloomberg (Chris Ratcliffe/Bloomberg)

(Bloomberg) -- Business chiefs are the most pessimistic they have been about Britain’s economy since late 2022, when the country was still reeling from the effects of Liz Truss’s short spell as prime minister.

The Institute of Directors said Tuesday that the fear of looming tax hikes and workplace regulations, expected to be brought in by the UK’s new Labour government, had contributed to the drop in its monthly economic confidence index.

The survey records the percentage difference in respondents who say they’re pessimistic about the economy against those who say they’re optimistic. It was minus 38% in September, having tumbled since July when more directors said they were optimistic than pessimistic in the aftermath of Labour’s general election victory. 

Investment intentions fell close to a four-year low, the survey of 661 respondents also showed. Anna Leach, the IoD’s chief economist, said Labour could boost growth and investment by clarifying its plans in the next few weeks. Chancellor of the Exchequer Rachel Reeves will deliver her budget on Oct. 30, having said she needs to fill a £22 billion ($29 billion) fiscal hole.

The IoD poll is just the latest in a raft of consumer and business sentiment surveys to suggest that the Labour government’s gloomy rhetoric ahead of the budget has dampened confidence.

It threatens to slow an economic recovery that is already running out of steam. Official data on Monday showed that GDP growth was slower than initially thought in the second quarter at a downwardly revised 0.5%. Output has also flatlined in three of the last four months with forecasters expecting the UK to expand at a more pedestrian pace of 0.3% a quarter going forward.

Still, there have been some positive signs. The OECD recently upgraded the UK’s prospects for growth over the next two years by more than any other Group of Seven country. Mortgage approvals are increasing, helping to lift house prices.

Interest Rates

Extra support for the economy from the Bank of England may be slow to arrive, however, as officials see off any lingering threat from stubborn price pressures. While the central bank cut interest rates for the first time in over four years in August, it skipped a move in September, and signaled a gradual approach ahead. Traders are only fully pricing in one more quarter-point reduction by the end of 2024, before more reductions arrive early next year.

Deflation has already reached some retailers, according to the British Retail Consortium, which said Tuesday that prices in September were 0.6% lower than a year ago. Food prices rose 2.3%, the BRC’s index showed, but non-food prices slipped 2.1%, with furniture and clothes particularly discounted.

Hospitality firms, such as pubs and restaurants, saw lower price increases from their suppliers in August, according to a separate survey by consumer data firm CGA by NIQ.

©2024 Bloomberg L.P.