Inflation is beaten but achieving growth will be tough

The British economy, against expectations, grew slightly in September, with GDP up 0.2pc on the previous month. Having contracted 0.6pc in July and grown just 0.1pc in August, that meant the UK “flatlined” during the third quarter of this year, with GDP the same as three months before.

The surprise September expansion reflected service sector and construction activity that outweighed lacklustre retailing and manufacturing. So Britain, unlike Germany and the broader eurozone, will this year avoid recession, defined as two successive quarters of falling GDP.

But only just. And that’s why the Bank of England was right to hold interest rates earlier this month, as in October, having already raised borrowing costs 14 times since December 2021. Even as our economy goes sideways, the Bank estimates just half of the impact of those multiple rate rises – from 0.1pc to 5.25pc – has so far fed through.

There is plenty of monetary tightening still in the tank, then, which is why growth is likely to remain sluggish. That’s why, when the inflation numbers for October are published on Wednesday, the headline measure could be close to 5pc, sharply down from 6.7pc in September.

Tighter credit and a lower Ofgem energy price cap mean the cost of living crisis could soon cease to be the dominant theme of British politics – to be replaced by an increasingly desperate search for growth. Inflation could yet surge back, not least because of an energy prices spike courtesy of the Opec oil exporters cartel or other geopolitical disturbances. But in the absence of that, the Tories will come under huge pressure finally to get the economy moving.

Ahead of his Autumn Statement on Nov 22, Jeremy Hunt is being urged by Tory MPs to indicate that tax cuts are coming. The Chancellor may have up to £90bn of the required fiscal headroom according to last week’s report from the National Institute of Economic and Social Research – a highly-influential research body that’s far more optimistic than the Office for Budget Responsibility, the official fiscal watchdog.

Earlier this autumn, in an effort to boost growth, the Tories announced that the Government would extend more North Sea oil and gas drilling licences. The UK continues to rely on oil and gas for about 75pc of our energy needs – including electricity generation and transportation. Even the Climate Change Commission – the Government’s powerful green advisory group – acknowledges dependency will still be 50pc by the mid-2030s and 25pc by 2050, when we’re supposed to be at net zero carbon emissions.

Oil and gas will be with us for a long time – and North Sea output is equivalent to 80pc of our annual oil use and just over half of the gas we need. And in last week’s King’s Speech, the Government signalled licensing rounds will now happen annually, rather than the long-standing pattern of roughly every other year.

Using North Sea energy means the UK gets the jobs and tax revenue, while adding to energy security. It’s also environmentally advantageous, given the huge carbon-intensity of importing

Getting the economy moving could be derailed by geopolitcal tensions and access to raw materials

liquefied natural gas from Qatar or the US. So while investment could be curtailed by the Government’s 75pc “windfall tax” on North Sea profits, a more predictable licensing regime is certainly a sensible move.

When it comes to generating growth, reliable supplies of semiconductors are almost as important as energy – given their widespread use across automotives, consumer electronics and, increasingly, artificial intelligence. But the geopolitics of chip supply chains are becoming as complex as those for hydrocarbons.

Taiwan boasts half of global production, followed by South Korea and Japan. The US is fourth – with 12pc of global output, followed by China. But China, of course, has its eyes on Taiwan. And the global semiconductors shortage sparked by global lockdown in early 2020 has by no means eased.

Semiconductors are tough to make, the skills needed are scarce and it takes years to get factories up and running. Supplies of vital inputs – such as neon gas and high-purity hydrogen fluoride – are closely guarded by nations such as Russia and Japan. Any medium-term UK growth plan needs to consider, as geopolitical tensions rise, where our semiconductors will come from.

The same applies to rare earths – the 17 elements used in electric vehicle batteries, wind turbines, lasers and, again, consumer electronics. China has 44m tons of rare earth oxide equivalent – 34pc of known global reserves.

The other big deposits – over 20m tons each – are in Vietnam, Brazil and Russia. Australia has 4.2m tons and the US 2.3m tons – so Western-friendly nations are relative minnows.

There is, of course, concern that China could hold nations to ransom. But, over recent years, rare earth prices have generally fallen, in part because Beijing has increased supply.

China is setting prices high enough to earn a good return, but not so high as to encourage other nations to build up rare earth production capacity. The People’s Republic will turn the screw when it comes to rare earth supplies at some stage. But, for now, Beijing is biding its time.

Getting inflation down has been painful, as real wages have fallen amidst multiple interest rate hikes – and we may not be there yet.

But securing long-term sustainable growth, amid rising geopolitical tensions, could be even tougher.

‘Using North Sea energy means the UK gets the jobs and tax revenue, while adding to energy security’