Hunt could still avoid recession and pave the way for tax cuts

An end-of-year lift has given the PM and Chancellor an electoral lifeline, Simon Foy, Szu Ping Chan and Daniel Woolfson report

While England’s World Cup campaign ended in characteristic disappointment, football’s centrepiece event at least produced one silver lining: boosting Britain’s ailing economy.

The economy unexpectedly grew in November by 0.1pc, according to the Office for National Statistics (ONS), partly driven by stronger activity in the hospitality sector.

Analysts at the ONS said the slight expansion in GDP was supported by the technology industry and a strong showing by pubs and bars as fans flocked to watch the football.

Recruiters also helped to boost growth, as Britain’s skills shortage saw many employers seek specialist help.

The data will fuel hopes that Britain may yet avoid plunging into an official recession, at least for 2022, while falling energy prices are also likely to boost the Treasury’s coffers further.

But will the unexpected uptick pave the way for Rishi Sunak – who has so far styled himself as a cautious economic firefighter – to transform the political narrative and unravel his Government’s punitive £24bn tax rises?

Early signs from the Treasury indicate that prudent managerialism remains the order of the day.

Fiscal discipline still dominates the discourse inside Downing Street, and Jeremy Hunt, who revels in being known as a “boring” Chancellor, isn’t a fan of pulling rabbits out of hats.

Government sources sought to play down any idea of a mini spending spree in the March Budget. Getting inflation down is the “entire focus” of No11, said one ally, suggesting policies that may stoke demand are off the table until MPS meet a goal of halving inflation from current double-digit rates.

Hunt stayed firmly on message yesterday. He said: “We have a clear plan to halve inflation this year – an insidious hidden tax which has led to hikes in interest rates and mortgage costs, holding back growth here and around the world.

“To support families through this tough patch, we will provide an average of £3,500 support for every household over this year and next – but the most important help we can give is to stick to the plan to halve inflation this year so we get the economy growing again.”

Economists at Citigroup declared November’s data a “pyrrhic victory”, saying the unexpected growth means the UK is now likely to avoid a second consecutive negative quarter in the final three months of the year and, in turn, a recession in 2022.

However, they added: “Output in November is now 0.3pc below February 2020 levels … The World Cup, and a late expansion in seasonal hiring in November, primarily explain the further increase in services output. Neither effect seems likely to last. Instead, we continue to expect a recession in the first half of 2023, and a 0.9pc contraction in 2023.”

Yet forecasters appear to at least have been wrong about 2022, as the economy will need to contract by 0.6pc in December to fall into recession – defined as two consecutive quarters of negative growth.

Garry White, at City stockbroker Charles Stanley, said: “World Cup spending on food and drink may have helped Britain escape a recession. This means the widespread view that Britain was already in recession is likely to be proved wrong.”

Elizabeth Martins, a senior economist at HSBC, said the small expansion now makes a recession avoidable, depending on December’s figures – a month plagued by industrial action but aided by retail and hospitality spending in the run up to Christmas.

Take fashion retailers Next and JD Sports. The former’s sales grew 4.8pc over the nine weeks to Dec 30 – £66m higher than the 2.2pc fall it had previously predicted.

JD Sports upgraded its profit forecast after sales rose 20pc over the Christmas period, which its chief executive, Régis Schultz, attributed to its younger shopper base, many of whom still live with their families and are benefiting from low unemployment. This meant they were able to indulge their trainer habits, helping JD put 600,000 pairs of Nike Air Force 1s through the tills in the last three months.

In grocery, too, Sainsbury’s, Tesco, Marks & Spencer and Lidl all posted strong results. Rosalind Hunter, partner at consultants Simon-kucher & Partners, said: “After two years of curtailed celebrations due to Covid, it seems that consumers were determined to push the boat out over the holidays despite economic concerns.”

Tesco, Sainsbury’s and M&S all painted a picture of shoppers abandoning the middle ground and either trading down into value products or spending more on top tier buys.

“Our customers wanted to do the best they could in terms of celebrating the Christmas period,” said the M&S chief executive, Stuart Machin.

However, now that Christmas is over a period of belt-tightening is expected.

The longer-term economic outlook has also shown some green shoots in recent weeks. JP Morgan’s Allan Monks said the sharp fall in wholesale gas prices will remove some of the downside growth risk in 2023 by alleviating some of the financial pressures on businesses.

Sunak is also facing pressure from his own backbenchers to cut taxes sooner rather than later or risk electoral oblivion. In a speech earlier this month, the Prime Minister pledged to “reduce the burden of taxation on working people” but failed to spell out which taxes he might target or when the cuts might take place. With the tax burden at the highest level since the Second World War, Tory MPS are increasingly on edge that a message of fiscal discipline will fall flat with voters come the next general election. This week, Boris Johnson even chimed in, saying Tories must make the case “for a low-tax global Britain” and fight the next election on a pledge to cut taxes.

However, if the economic reality continues to defy the more gloomy predictions, Sunak could use the extra fiscal headroom to unleash a wave of tax cuts before the next election and, in turn, boost the Conservatives’ chances of securing a fifth consecutive term.

It will also make it easier for the Government to scale back its energy bill subsidy scheme, which, in its current form, will cost the Treasury more than £18bn in the six months to April, according to the Office for Budget Responsibility (OBR).

The OBR’S forecasts have not always been infallible. Government borrowing between April and November came in nearly £8bn below the level the watchdog estimated just two months ago, largely thanks to lower spending on things such as debt interest and higher payroll tax receipts.

Proceeds from income tax and National Insurance contributions grew 12pc in November, owing to strong wage growth. Economists also point to an increase in seasonal hiring as a factor that helped to lift economic output in November amid a tight labour market.

On Thursday, the ONS said that more than a quarter of British businesses were experiencing a shortage of workers, while more than half of those businesses reported that employees were working increased hours as a result of these shortages.

Despite the constraints, the need for the extra staff, particularly in the retail and hospitality sectors, coupled with staff working overtime contributed to the better-than-expected performance in November.

Meanwhile, the Treasury is also set to receive a £3.8bn windfall from the Bank of England’s emergency bond market intervention in the wake of Liz Truss’s chaotic mini-budget.

On Thursday, Threadneedle Street revealed that it made almost £4bn in profits from buying and selling gilts as part of the scheme, which will be handed over to the Treasury under an agreement between the Government and the central bank and boost the public finances.

However, some economists remain gloomy. Thomas Pugh, an economist at consulting firm RSM UK predicted a recession was “delayed, not cancelled” as consumer spending is likely to slump post-christmas. He said: “Inflation continues to put material pressure on households’ disposable income and companies are reining in investment as profit margins are squeezed and the cost of borrowing soars.”

Whether the better-than-expected economic performance alters the political equation remains to be seen, but Sunak and Hunt appear unlikely to abandon their “safe pair of hands” image before the Spring Statement.

Yet with the local elections likely to hand Sunak his first electoral drubbing in May, and with Johnson reportedly on manoeuvres once again, low-risk Rishi might need to offer voters more than economic prudence – and an improved economic outlook could give him the room to do that.