Economy has turned corner, Sunak tells 2024 Business Council
◆ UK inflation holds steady and food prices fall but Bank of England remains concerned about economic pressures, writes Scott Reid
The Prime Minister has insisted the “economy has turned the corner” as he convened the first meeting of his 2024 Business Council.
Rishi Sunak labelled himself “unashamedly pro-business” as he delivered some short opening remarks to chief executives in Downing Street yesterday morning.
He acknowledged “global headwinds” affecting businesses, referencing disruption in the Red
Sea – where violence by Houthi rebels has caused firms to redirect shipments – which is understood to be partly linked to recent tea supply issues.
But overall the Prime Minister was optimistic about the business sector.
It comes as Consumer Prices Index (CPI) inflation remained unchanged at 4 per cent in January.
The figure is lower than the 4.2 per cent that economists had forecast although it is still double the Bank of England’s 2 per cent target, the Office for National Statistics (ONS) said.
But with the ONS due to publish gross domestic product (GDP) figures for December 2023 today, the UK is expected to have slipped into recession at the end of last year after a weak month for the country’s economy.
Most economists are forecasting a 0.1 per cent decline in GDP between October and December.
This would follow a 0.1 per cent contraction in the previous three months, after a downward revision against the zero growth initially estimated. A contraction in the fourth quarter would mean the UK tipped into a technical recession, as defined by two or more quarters in a row of falling GDP.
Addressing the Business Council – which includes the heads of Rolls-royce, ITV and Almac – Mr Sunak said: “I’m absolutely determined to make the UK the best place in the world to start to grow and invest in businesses.
“Of course we're still battling with lots of global headwinds, not least the Red Sea at the moment, but at the start of this year I absolutely believe that the economy has turned the corner and we're now pointing in the right direction.”
He continued: “Hopefully that’s something that you’re seeing in your businesses, but inflation has been more than halved from 11 per cent down to 4 per cent, mortgage rates are starting to come down.
“Everyone is predicting us to grow this year.
“I think PWC has said that we’re going to outperform France, Germany, and Japan this year.”
The Prime Minister said that “because of all of that” the government has been able to start cutting taxes.
Mr Sunak told attendees that business “defined” his life before politics.
He said: “I grew up in a small business family, worked for my mum, did her accounts. (It) defined my career before I entered Parliament, I obviously worked in investing and finance, investing in businesses, helping them grow, and scale and thrive.
“And obviously, it defined my initial time in government... as chancellor of the Exchequer working with many of you during the pandemic.”
Relief for hard-pressed borrowers and businesses could come in the next few months, possibly as early as June, after reassuring – and unexpected – news on the inflation front.
Analysts described January’s unchanged annual inflation rate of 4 per cent as “encouraging”, coming as it did against expectations for another slight increase, to 4.2 per cent, following December’s upturn from 3.9 per cent. The latest official figures showed that food prices fell last month for the first time in almost two-and-a-half years.
While the headline inflation rate remains double the Bank of England’s 2 per cent target, hopes are building that the lack of any new shocks could persuade policymakers to opt for a cut in interest rates in the coming months.
However, while prices appear to be cooling, wages are still rising at a faster rate and there could still be inflationary fallout from global events such as the current conflict in the Red Sea.
At the start of this month, the UK’S central bank voted to hold the base rate at 5.25 per cent for the fourth time in a row and following 14 consecutive rises. While those with savings have been benefiting from higher interest rates, they have had a negative effect on the millions of householders and companies with mortgages and borrowings.
On the positive front, most experts are expecting a downward trend in inflation over the next few months and with little to no growth in the economy the Bank of England may be pushed into cutting rates as early as late spring.
Sarah Coles, head of personal finance at investment platform Hargreaves Lansdown, said inflation was expected to “dip significantly lower” in the months to come, towards the Bank’s 2 per cent target in the spring, when lower wholesale gas prices feed into the figures.
But she warned: “That’s not the end of it though, unfortunately, because after hitting the target it’s expected to bounce back, and take a while to drop back again. As a result, the Bank of England has already said it’s not going to cut in a hurry.
“A surfeit of caution means they won’t cut until lower inflation has bedded in, and we’re a fair way from that. There are still some economists forecasting a cut as early as May, but there’s every chance we won’t see this until the second half of the year.
“The market has also started pricing in fewer rate cuts by the end of the year.”
Clive Black, head of consumer research at brokerage Shore Capital, noted: “[Inflation] has come in at 4
If rates stay higher in the short-term, inflation beating options for cash savers remain available Kevin Brown at Scottish Friendly
per cent, a little below consensus expectations. Whilst the faster money will fret around the edges, we see this as a sound position with inflation in much more comfortable territory for consumers and businesses alike, almost in fact in Goldilocks territory. Quite whether the [Bank of England’s] monetary policy committee (MPC) feels the same, well who knows?
“We continue to expect, external shocks aside, more stable and easing [inflation in 2024] with a first interest rate cut by the end of June. The outlook is brightening as living standards rise.”
Kevin Brown, savings specialist at Glasgow-based mutual Scottish Friendly, said there may be some concern that the MPC will need to “turn the heat up even higher” in the shape of further rate rises to throttle inflation.
“Mortgage borrowers and the wider UK economy will be hoping not,” he added, “as higher mortgage repayments and the potential for a recession are both likely to cause problems for many families. On the flip side, if rates stay higher in the short-term, inflation beating options for cash savers remain available and many may still feel the attraction of easy access cash in times of economic uncertainty.”
The Office for National Statistics’ (ONS) data for January revealed a monthly drop in food prices of 0.4 per cent – the first since September 2021 – with the cost of bread and cereals, cream crackers and chocolate biscuits falling.
While food and non-alcoholic
beverage prices are still 7 per cent higher than a year ago, the category saw the slowest rate of increase since April 2022. On a monthly basis, food and nonalcoholic beverage prices fell by 0.4 per cent between December and January.
Despite the most recent fall, food and non-alcoholic beverages are around 25 per cent more expensive than they were in January 2022. In the entire decade before that, prices only rose around 10 per cent. The current cycle of inflation saw the annual rate peak at 11.1 per cent in October 2022 – marking a 41-year high.
ONS chief economist Grant Fitzner said: “Inflation was unchanged in January, reflecting counteracting effects within the basket of goods and services. The price of gas and electricity rose at a higher rate than this time last year due to the increase in the energy price cap, while the cost of second-hand cars went up for the first time since May.
“Offsetting these, prices of furniture and household goods decreased by more than a year ago and food prices fell on the month for the first time in over two years. All of these factors combined resulted in no change to the headline rate this month.”
Chancellor Jeremy Hunt said: “Inflation never falls in a perfect straight line, but the plan is working. We have made huge progress in bringing inflation down from 11 per cent, and the Bank of England forecast that it will fall to around 2 per cent in a matter of months.”