Recession alarm bells were ringing in the City today after the Bank of England slashed its growth forecast for this year to just 0.75%.
The Bank, which today also cut its main interest rate to 4.5%, had previously expected growth this year to be twice as fast at 1.5%.
Inflation will also be higher than expected spiking to 3.7% later in the year largely because of higher energy prices but also due to employers passing on higher NI bills through prices.
The odds of a “Reeves Recession” over the winter half of the year shortened when the Bank said the economy probably contracted by 0.1% in the first quarter of last year, and will grow by only 0.1% in the current quarter.
Any fresh setback or further slowing in economic activity -perhaps triggered by a full scale Trump trade war - before the end of March could mean GDP falling in the first quarter of the year too.
That would meet the technical definition of a recession - two consecutive quarters of negative GDP growth.
Matthew Ryan, head of market strategy at financial services firm Ebury said: “This is a very dovish set of communications from the Bank of England, which really hammers home just how concerned rate-setters are with the state of the UK economy and, dare we say it, the possibility of a recession. “
Today’s report from the Banks Monetary Policy Committee (MPC) suggests that growth will start to pick up from the summer.
However, the new forecasts are a blow for the Chancellor who launched her setpiece growth plan last week with a third runway for Heathrow at its centrepiece.
However critics say that the sharp slowdown in growth is of her own making because of the gloomy political rhetoric about the state of the economy after the election and the £25 billion tax raid on business in the Budget.
The MPC said “the weakening in economic activity has been associated with a deterioration in business confidence” linked to “geopolitical and trade uncertainty, but also the impact of recent changes to taxation.”
It goes on to warn that “if this weak sentiment persists, it presents some downside risks to the projection for GDP growth.”
The MPC vote split caught markets by surprise with two members, including “arch hawk” Catherine Mann voting for a bigger 0.5% cut to boost the economy.
Laith Khalaf, head of investment analysis at brokers AJ Bell, said: “The big downgrade in the growth forecast for 2025 will come as a blow to the Chancellor who has made growth her key mission.
“It’s looking increasingly likely that Rachel Reeves is going to have to do something substantial alongside issuing the Spring Statement in March, despite committing to only one fiscal event per year.”
FX analyst Kyle Chapman at Ballinger Group said: “This monetary policy report is a damning assessment of the economic impact of Reeves’ fiscal choices, and it will likely fuel calls for her exit.
“The government’s overarching goal is growth, and the UK central bank is telling it that Britain won’t eke out even a 1% expansion this year.”
Nicholas Hyett, investment manager at Wealth Club, said: “Recent economic data points to a slowdown in the UK economy – GDP came in lower than expected, inflation has fallen and unemployment has ticked up. The outlook is gloomy too, with many companies thought to be considering job cuts before a rise in the living wage and higher national insurance contributions in April.
