We might have reasons to be cheerful about economy

The UK delivering growth of 0.3 per cent in November isn’t normally something that I’d write home about, but this time, it got me out of bed. November, you’ll remember, was the month in which pre-Budget speculation was at its darkest and leaks from government poured their fumes into the economic air. The Reuters forecast called for growth despite this. But only just — the consensus was 0.1 per cent. This is one instance where I am not going to berate the City’s scribblers for getting it wrong this time. Given the Budget from hell we were being primed for, I’d expected a zero at best. All the more so given the horrible slump that construction has been mired in. It’s a relatively small contributor compared to the dominant service sector but a drag is still a drag.

So what happened? Well, some of that unexpectedly sunny number was down to a sharp increase in car production as Jaguar Land Rover recovered from the cyber attack which blew out its tyres. Retail has delivered a mixed picture, as usual. But the Office for National Statistics (ONS) suggested that November, with all the fuss and nonsense created by Black Friday (like Christmas, it seems to start earlier every year), prompted consumers to open their wallets. The ONS also highlighted a boom in tax consultancy. Big surprise there, given the budget. Sport, recreation and travel were also active.

The cost-of-living crisis is a phrase that is still often heard. But pay has been consistently outstripping prices for some time now. Combine this with flat-ish house prices and better mortgage deals, and perhaps the result shouldn’t come as such a surprise — even with the threat of tax rises hanging over everyone. It might be that people simply felt like indulging in a splurge. Might as well splash out before the roof falls in. It is worth pointing out here that the three-month rolling figure, which is less volatile and more reliable, was much less exciting. The economy grew, but by just 0.1 per cent over that longer period. However, that is still better than I had feared. The big question is whether this will be sustained, as forecasters give their predictions for the UK’s final result for 2025 a modest uptick. Over to Capital Economics to make the case for caution.

“We think November’s strength is more likely to be a rebound rather than a sign that the economy is fundamentally stronger than we thought,” the consultancy said. That is a legitimate view given the contribution from car making, except that there was clearly more to this than just Jaguar Land Rover getting its production lines rolling again, which fed through to its supply chain. So yes, there may well be a reason for Britain’s beleaguered Chancellor to smile, or perhaps to breathe a sigh of relief. If Capital Economics is wrong, and the economy kicks on from here, her fiscal headroom will increase and the next Budget will be a lot easier. It certainly needs to be. A restive electorate will not accept another raid. Rachel Reeves is doomed if she can’t deliver some relief to those of us who are paying for Labour’s policies.

The downside, of course, is that all this may stay the Bank of England’s hand when it comes to further easing the burden of high(ish) interest rates with the February meeting of the rate-setting Monetary Policy Committee (MPC) fast approaching. Inflation is expected to show a fall from November’s 3.2 per cent when December’s figure is published, and some of the MPC’s members have been out and about making dovish noises. Alan Taylor, an external member and Reeves’ first appointment, said inflation is now expected to fall to the Bank’s 2 per cent targets in the middle of this year, instead of early in 2027, in a speech on Wednesday.

“Interest rates should continue on a downward path, that is, if my outlook continues to match up with the data, as it has done over the past year,” he said. Now, it should be noted that Taylor has shown himself to be among the MPC’s more dovish members. However, it is also notable that the Bank’s governor, Andrew Bailey, also said inflation could fall to around 2 per cent, and as early as April this year. Bailey, remember, was the crucial swing voter when the committee voted 5-4 in favour of a cut last month, which left base rates at a near three-year low of 3.75 per cent.

A second successive reduction would come as a shock, and I wouldn’t expect it to happen. The MPC will likely sit on its hands, although there will still be votes in favour of further action from some of its members. However, people looking to buy a home or to remortgage their existing residence shouldn’t feel too disheartened. The expectation that rates will fall further this year is already feeding through to the market. Building Society Nationwide cut its rates this week in what broker John Charcol’s Nick Mendes described as “a real line-in-the-sand moment, and a benchmark other lenders will be watching closely”. Wait, does this mean everyone’s a winner? I wouldn’t get too excited just yet. But there is certainly a chink of sunlight poking through the clouds that have settled over the nation. Expect green shoots soon...