Everyone is predicting a recession – but I just don’t buy it
Liam Halligan
5 min read
jeremy hunt - Stefan Rousseau/PA Wire
In the early 1990s, having claimed to have spotted “the green shoots of recovery”, Norman Lamont was widely derided. But it turned out he was right.
Soon after the then chancellor’s much-mocked comments, the UK climbed out of recession. But almost no one remembers that – recalling only the criticism he endured.
That’s one reason economists of a certain vintage so rarely point to signs the outlook is improving. Panglossian words are met with rolling eyes.
So it’s with trepidation that I’m declaring – drum roll – I see multiple green shoots. The commentariat has been too gloomy for too long – it’s time to cheer up.
In early February, the influential Chartered Institute of Procurement reported the sharpest monthly rise in business optimism since November 2020. Then, late last month, a survey from data company GfK showed an unexpected bounce back in consumer confidence, with retail sentiment at its strongest in almost a year.
And on Friday, we saw evidence that the UK’s services sector – accounting for four fifths of GDP – is growing at its fastest pace for eight months. The closely watched Purchasing Managers' Index, which surveys business leaders’ views, showed a reading of 53.5 in February, with figures above 50 indicating growth – sharply up from 48.7 the month before.
Companies from restaurants, pubs and hotels to hairdressers and builders have grown more optimistic in recent weeks, amid signs broader inflationary pressures are easing. Interest rates, having soared from 0.5pc to 4pc during 2022, may now be close to their peak.
There’s plenty of bad news, of course – with millions of households still enduring squeezed budgets, not least given sky-high utility bills. Countless businesses are also struggling, given pressure to raise wages amid ongoing labour shortages.
Having said that, input cost inflation is now abating, as post-lockdown supply chain blockages finally ease and shipping costs keep falling. Drewery’s composite world container index, a global measure of seaborne freight charges, is now 80pc lower than this time last year.
These chinks of light explain why forecast business activity just hit an 11-month high. As such, the UK’s “composite PMI” – services and manufacturing combined – rose to 53.1 last month, the first 50-plus reading since August. That compares favourably with 50.1 in the US, 50.7 in Germany, Japan’s 51.1 reading 51.7 in France.
Economists have been warning for a year and more that the UK faces its first non-lockdown recession since the 2008 financial crisis. The Bank of England, in particular, still predicts a prolonged contraction – but I just don’t buy it.
It’s true the full impact of the Bank’s 10 straight interest rate rises has yet to feed through into the economy. And signs of recovery mean that instead of rates peaking at 4.25pc, as markets were predicting a few weeks ago, the Monetary Policy Committee may yet push them up to 4.5pc or even 4.75pc. But the bottom line is that, beyond the headlines, a string of recent survey data indicate the UK economy is holding up far better than almost all economists feared.
Yet these green shoots remain vulnerable and could easily be uprooted. Ongoing military conflict in Ukraine, and the related East-West economic war, could yet cause another financial shockwave, given Russia’s key role in global food and energy markets.
And with global bond markets still shaky, efforts by the world’s pivotal central banks to wind down years of quantitative easing, weaning governments in the US, UK and elsewhere off a decade and more of money-printing, could yet cause a market meltdown.
But the most likely reason the UK’s fragile recovery will be thwarted is our own government. As such, it is vital that when he delivers his Spring Budget on March 15, Chancellor Jeremy Hunt avoids making big mistakes. And perhaps the most serious policy error would be to go through with the long-standing plan to raise corporation tax from 19pc to 25pc this coming April.
Last month, the pharmaceutical giant AstraZeneca chose the Republic of Ireland, where the corporation tax rate is 12.5pc, over the UK for its new manufacturing facility. Since then, the mighty BT has publicly warned the burden on business is becoming too high.
“There is a range of academic evidence,” according to a recent research paper published by the Treasury, “which suggests that cutting corporation tax can boost investment and growth by providing immediate support to businesses in short-term, and increasing business investment, productivity, and growth in medium-term to long-term”.
On top of that, Hunt himself, when he stood to be Tory leader in mid-2022, argued that corporation tax should fall to 12.5pc, or 15pc at most. Yet here he is, on the cusp of implementing the first increase in this profits tax in more than half a century – a move which will hammer business sentiment, pouring acid over those fragile green shoots.
Public sector borrowing is already £31bn lower since last April than predicted by the Office for Budget Responsibility. And the Institute for Fiscal Studies last week forecast a £25bn drop in predicted government spending in the next fiscal year – due to lower interest payments, reduced energy subsidy costs and stronger tax receipts.
Raising corporation tax by a massive 6 percentage points will hammer both big and small firms, stymying investment and growth. Keeping the tax at 19pc, when it’s long been expected to rise, would in contrast be a huge boost, feeling like a tax cut.
And the likelihood is far from strengthening our public finances, a higher corporation tax rate will anyway cost the Treasury money. After all, from 2010 to 2017, as the rate fell from 28pc to 19pc, receipts doubled from £31.7bn to £62.7bn – that is, 2.4pc to 2.9pc of GDP – given the boost to growth.
The UK’s reputation as a place to do business has endured a lot of knocks over recent years. That’s why we desperately need to signal, to domestic and international investors alike, that this government backs growth and enterprise – and scrapping this tax rise is just the ticket.
Thirty years ago this spring, Norman Lamont left No 11. What a shame if today’s Chancellor – ignoring a growing coalition of firms, academics and his own MPs – went ahead with this mindless corporation tax increase, stamping on today’s green shoots.
