Xmas Sales Slump means the UK is now in a Recession

The news that retail sales fell by 3.2% in December 2023, the biggest decline since January 2021, will have almost certainly pushed the U.K economy into a mild technical recession, defined by two consecutive quarters of falling economic output. Being a likely election year with the Conservative Party trailing in the polls any evidence of a developing recession severely undermines the Chancellor of the Exchequer’s claim that the economy is moving in the ‘right direction’.

With time running out before the next General Election the Chancellor, Jeremy Hunt, has recently given strong hints that he wants to cut taxes in the Spring Budget stating in a recent speech at the World Economic Forum in Davos that countries with lower taxes have ‘dynamic, faster growing economies’. His ability to cut taxes in March will be highly dependent on whether the Bank of England’s (BoE) monetary policy committee vote to reduce the bank rate on 1st February and on the forecasts currently being prepared by the Office of Budget Responsibility (OBR).

Although the BoE have sole responsibility for UK monetary policy and do not have a formal relationship with the OBR, staff of both organization's meet regularly to discuss forecasting issues of mutual interest. Should interest rates remain unchanged at the next MPC announcement on 1st February the scope for immediate tax cuts would be limited but it would still be possible for the Chancellor to announce future-dated tax cuts in the budget if the OBR’s forecasts show that it would be feasible to do so without increasing government borrowing in the longer term.

It is ironic that the current Chancellor is now under considerable political pressure to reduce taxes when, only 15 months ago, he was forced to abandon the tax cuts announced by Kwasi Kwarteng in the doomed ‘dash for growth’ budget that led to the resignation of then Prime Minister, Liz Truss . Whilst it is true that any tax cuts announced in 2024 will be fully-funded and backed up by detailed OBR forecasts - unlike the failed budget of 2022 - the Chancellor will be extremely mindful of the impact his decisions may have in regard to the bond market and governments future cost of borrowing.

To date, the BoE has maintained a hawkish stance regarding the use of bank rate to fight inflation and there is no evidence suggesting that a rate cut is likely in the near future. The geopolitical situation in the Middle East may well harden their resolve not cut rates prematurely but this will be weighed against any further signs of a collapse in overall demand in the economy. While interest rates remain at 5.25% the short-term impact of any fiscal stimulus provided by the Chancellor will be modest in terms of alleviating the cost-of-living issues affecting many voters.