Recession alarm bells were ringing in the City today after the Bank of England slashed its growth forecast for this year to just 0.75%. The Bank, which today also cut its main interest rate to 4.5%, had previously expected growth this year to be twice as fast at 1.5%. The odds of a “Reeves Recession” over the winter half of the year shortened when the Bank said the economy probably contracted by 0.1% in the first quarter of last year and will grow by only 0.1% in the current quarter.
Any setback or slowing in economic activity by the end of March could mean GDP falling in the first quarter of the year too. That would meet the technical definition of a recession - two consecutive quarters of negative GDP growth. Today’s report from the Banks Monetary Policy Committee (MPC) suggests that growth will start to pick up from the summer. The MPC said “the weakening in economic activity has been associated with a deterioration in business confidence” linked to “geopolitical and trade uncertainty, but also the impact of recent changes to taxation.”.
It goes on to warn that “if this weak sentiment persists, it presents some downside risks to the projection for GDP growth.”. The MPC vote split caught markets by surprise with two members, including “arch hawk” Catherine Mann voting for a bigger 0.5% cut to boost the economy. FX analyst Kyle Chapman at Ballinger Group said: “This monetary policy report is a damning assessment of the economic impact of Reeves’ fiscal choices, and it will likely fuel calls for her exit.
“The government’s overarching goal is growth, and the UK central bank is telling it that Britain won’t eke out even a 1% expansion this year.”. Nicholas Hyett, investment manager at Wealth Club, said: “Recent economic data points to a slowdown in the UK economy – GDP came in lower than expected, inflation has fallen and unemployment has ticked up. The outlook is gloomy too, with many companies thought to be considering job cuts before a rise in the living wage and higher national insurance contributions in April.
