It’s a somber end to the year in Britain, dampened by a string of disappointing economic news. Inflation has jumped, the economy has stagnated and consumer confidence surveys are deeply downbeat.
The year started with an unexpectedly strong rebound out of a recession, anticipation of interest rate cuts and the prospects for a new government that vowed to restore sustainable economic growth. Voters put the Labour Party in charge in July, ejecting the Conservative Party from power after 14 years.
But optimism has been difficult to muster lately. Labour’s first budget included larger-than-expected spending and investment plans, offering some stimulus to the economy, but also raised taxes on businesses. And while interest rates are coming down, the pace has been slow.
On Thursday, the Bank of England decided to hold interest rates at 4.75 percent. The announcement came the day after data showed that inflation accelerated to 2.6 percent in November, from 2.3 percent the previous month, moving further away from the bank’s 2 percent target.
“We think a gradual approach to future interest rate cuts remains right, but with the heightened uncertainty in the economy we can’t commit to when or by how much we will cut rates in the coming year,” Andrew Bailey, the governor of the central bank, said in a statement.
Since the summer, the Bank of England cut interest rates by half a percentage point. By comparison, the U.S. Federal Reserve and the European Central Bank both lowered rates by a full point over that period.
“Next year is going to continue to be pretty challenging for the U.K.,” said Katharine Neiss, the chief European economist at PGIM Fixed Income, an asset manager. “We aren’t talking about an economy that’s firing on all cylinders here.”
Recent data showed the economy contracting in October for the second month in a row, and weak growth in business activity in December.
Still, it’s not all bad. Though the new government isn’t particularly popular, it is stable, unlike those in France, Germany and Canada. And, so far, Britain doesn’t seem in the firing line for the stiffest tariffs that President-elect Donald J. Trump has said he will impose in his second term.
Labour’s budget, announced in October, will boost economic growth in the short term as it bolsters spending on public services, according to the Office for Budget Responsibility, an independent watchdog. But the budget is also expected to increase inflation, further dampening expectations for rate cuts.
The Bank of England doesn’t expect inflation to return sustainably to its 2 percent target until 2027. Recent wage data showed strong inflationary pressures and policymakers have said they need to wait to see how businesses respond once higher taxes take effect in April. Policymakers are also watching geopolitical tensions and uncertainty about trade policy, which could include sweeping tariffs imposed by the new U.S. administration. “These developments have generated additional uncertainties around the economic outlook,” the central bank said on Thursday.
Andrew Goodwin, an economist at Oxford Economics, said he expected inflation to be around 3 percent next year, and for the Bank of England to continue its gradual approach to lowering interest rates. The economy is likely to be “bumbling along” at about a 1.5 percent growth rate, he said, which would be slower than the Office for Budget Responsibility’s forecast.
“We are still experiencing some pretty big headwinds,” Mr. Goodwin said. The short-term boost in public spending gives way in less than two years to tight budgets for government departments, he said, and it will take a long time for lower interest rates to propel higher economic growth.
But he offered some leeway to the new government. “They’ve taken the view that the problems are so deep rooted that this is a isn’t a quick fix,” he said. “We do have to give them a little bit of time to sort these problems out.”
In the next few months, a major source of uncertainty is how businesses will react when taxes rise. Starting in April, employer contributions to National Insurance, which funds state benefits including pensions, will increase by a little over 1 percentage point. The government has also lowered, by nearly half, the wage threshold that triggers National Insurance contributions.
For the hospitality industry, the changes in the budget, which also included an increase in the national minimum wage, amounted to a “tax bombshell,” said Kate Nicholls, the chief executive of UKHospitality, an industry lobby group. She said businesses, which operate on tight profit margins, were already cutting hours for staff, planning to raise prices and delaying investments.
“The budget was a real body blow to the hospitality sector,” Ms. Nicholls said.
Rachel Reeves, the chancellor of the Exchequer, has said the tax increases were essential to shore up the public finances because the previous government had left a “black hole” of £22 billion, or nearly $28 billion. The extra revenue was also needed to strengthen public services, including the National Health Service and schools.
The Labour Party is betting that reforms to the planning system, so more houses can be built and the energy grid upgraded faster, will unlock private-sector investment and promote long-term economic growth.
Ms. Nicholls said that the government’s plans are welcome, including those to improve broadband access and revitalize shopping areas. But the effects will take at least a year to materialize, she added.
“There’s no way of getting around the fact,” Ms. Nicholls said, “that for the next 12 months, hospitality has a huge amount of pain.”
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