February 10, 2025 - 11:50am
Last week the Bank of England cut the base rate of interest to 4.5%. Initially, that might appear to be good news: a lower interest rate should stimulate consumer demand, while reducing the costs of borrowing for business. Given energy costs remain high, and a rise in the minimum wage in April will be attended by an increase to employer National Insurance contributions, it should offer relief to struggling firms across Britain.
Interest rates can make or break governments. A major factor behind the scale of Conservative defeat last July was the continued inability to bring inflation down quickly, thereby ruling out interest rate cuts. If you want to understand how the Tories grew their vote in every election for a decade after 2009, near-0% interest rates are a good place to start.
But that rare bright spot amid a sea of January gloom was accompanied by something far more important. Interest rates have not been reduced as a result of inflation heading towards the BoE target of 2%, but because Britain could be in line for another recession — its third in five years.
The Bank of England prognostications aren’t good. Last week the central bank halved projected growth for 2025 from 1.5% to 0.75% — with a contraction for the final quarter of last year and an increase of just 0.1% for the first quarter of this year. What’s more, the BoE expects inflation to now edge up to 3.7% as a result of higher energy prices.
Britain probably sailed closer to an emergency Budget in January than we realise. What decisively ruled that out was news that inflation had fallen to 2.5%. That created the space for the Bank of England to reduce rates and — hopefully — stimulate growth. Had the mid-January inflation call been substantially higher, Rachel Reeves would have had to announce more cuts, or taxes, or both. There was a reason the Chancellor, throughout the first half of January, repeatedly said the Government would stick to its fiscal rules: it was a signal to the markets.
The spectre of recession was first visible last autumn. It started with falling business confidence, primarily the result of Reeves’s and Keir Starmer’s constant miserabilism about the UK. Then, in December, it was announced that employee headcount, with the exception of the pandemic, was being cut at the fastest rate since 2009. Also that month, the Lloyds tracker reported how economic output had contracted in 11 of the 14 sectors it monitors.
Then, in January, Alan Taylor, an external member of the BoE’s Monetary Policy Committee, gave a speech about how the UK would need to fast-track five or six interest rate cuts this year. The subtext was that without a decisive intervention in monetary policy, the British economy would fall into recession. Weeks later the CBI reported that most private sector companies expect their output to fall between January and April. That is before changes to National Insurance contributions. It’s no surprise, then, that we’ve seen a rapid shift in support of a cut to rates as a stimulus to growth.
What happens next? For one thing, it’s easier than ever to identify Labour as the party of national and global capital over local capital, something which likely benefits upstart Reform UK. Emblematic here are changes to business rates which could wipe out as many as 9000 pubs. To the likes of Reeves and Starmer, these are merely figures on a spreadsheet, or at least that is the impression they give. Labour finds itself in a bind, having promised not to increase income and corporation taxes, while also dealing with a disintegrating public realm and spiralling costs to service the public debt. Reeves needed to find the cash, but changes to employers’ NI was the wrong way to do it.
As an alternative, Labour could wage war on rent-seeking and profiteering in the public sector, a popular message beyond just the Left. The outsourcing of children’s and elderly care, as well as the likes of street cleaning and water, have led to worse outcomes, higher bills and penniless local authorities. Yet rather than take on those special interests, once it entered office Labour revealed its allegiance to BlackRock and other financial organisations driving such parasitism.
Labour’s problems are multiform: a poor inheritance, a dysfunctional state, and no visible growth model. While much of that isn’t the party’s fault, a turnaround requires a critique of where the country has gone wrong for 40 years. That appears unlikely to happen, not least because for the Blairites it would require some serious self-reflection.
Aaron Bastani is the co-founder of Novara Media, and the author of Fully Automated Luxury Communism.
AaronBastani
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SubscribeFinal paragraph sums up the situation beautifully; from which we may conclude there is little chance of escaping another recession. Let’s hope it’s a short one!
I thought we were in one now. A long one. This isn’t from analysing a load of meaningless government stats but just looking at my own financial health and noticing what’s going on, and more often what’s not going on, around me.
I could just about swallow the “Labour’s poor inheritance” line of propaganda if they hadn’t spent their 14 years in opposition arguing for even more inflationary expenditure and cultural wastage and then proceeded to do even worse in government.
Indeed. 14 years of conservative failure is something that most people recognise, hence the election results. When your response is (much) more of the same, it’s not really a defence.
As for high energy costs, the biggest part of that is the government’s share, but they’ll point the finger everywhere except at themselves.. We can’t get very fat off revenue from energy-producing companies while simultaneously trying to tax and regulate them out of existence.
I love how governments and economist think that a reduction in the interest rate will have any meaningful effect on small businesses. No one. And I mean NO ONE who has a small business is thinking “ooooh, economy is on the brink, let’s take out a loan!”.
Meanwhile a hike in NI for many small businesses is absolutely crippling.
Add into this a client base that is working from home. Working very inefficiently, caught between online management software, endless zoom calls which resolve nothing other than “let’s have another zoom call this time next week” and putting the washing machine on.
Deadlines that come and go. Projects that start and then die off once the FD decides it’s not needed or too expensive.
Oh and don’t forget the rising panic that is AI and the will it take my job and yours conundrum!
Yes, business is in a sorry state. Zero productivity. Zero confidence. And a government that is soooooo beyond f*%#ing clueless it’s bordering on funny. They actually maker the Conservatives look semi-competent.
Oh and don’t even mention the energy costs… ooops just did. But it’s okay, Mr Bastani will probably tell us next that communism is the answer. Because that’s worked EVERYWHERE it’s been tried right!?
We are all donkeys, being led by clowns in a circus of complete and utter dumbassery!
Too right. These Labour guys are so far beyond clueless that a new word will have to be found for the dictionary to describe just how clueless they are. No-one in their right mind is going to invest or take on new staff while they are in office. I sure as hell won’t.
Spot on, as a small company owner myself. What is also crippling is 25% Corporation Tax. I won’t ever vote Tory again, sod that.
The State is crippling business with its sky-high taxes. Why bother trying to build a business, accepting insecurity and other risks, when so much is taken off us?
John agree. Labour’s major error was swanning into office believing there was headroom for a business tax squeeze. They didn’t take imto accoumt that in the preceding 10 years the Consocialists had already done untold damage on SMEs through assymetrical regulation and taxation. The Hunt 6 % point Corp Tax rise so quickly followed by NIC was the tipping point for many. Changes in.IR35 rules.also impacted many.
In my network of west of.London.SME owners they are 1. Hunkering down 2. Taking early retirement in mid 50s (particularly in light of IHT rule changes) 3. Liquidating assets against anticipated CGT changes and moving into carry assets (enough said) 4. Leaving (often linked fo early retirement). They are the backbone of the SME sector.employing 10 – 20 people, turning over about £5m operating out of small industrial parks and offices. Most were entirely bewildered by what happened in October, little able to undersfand that anyone in a position of power could be so moronic. Most did full freeze on expenditure immediately.after the budget, visit to accountants November, regroup the wagons December. Coming into 2025 mood is sombre.
“a lower interest rate should stimulate consumer demand, while reducing the costs of borrowing for business. Given energy costs remain high, and a rise in the minimum wage in April will be attended by an increase to employer National Insurance contributions, it should offer relief to struggling firms across Britain”
“The outsourcing of children’s and elderly care, as well as the likes of street cleaning and water, have led to worse outcomes, higher bills and penniless local authorities.”
Presumably the author is paid to write nonsense like this.
Einstein said that insanity is doing the same thing over and over again and expecting different results. There is quite some evidence that it was precisely this subordination to finance that got the UK where it is in the past 40 years.
Even worse is that a lot of this private equity and asset management got insanely big because they essentially absorbed huge sums of public stimulus after the 2008 crisis and the pandemic. So they essentially use public money to buy (public) assets, in order to rent them out to the public, while they tell the government to go into austerity and spend less on public services. And a party, which for some strange reason is called the Labour Party, thinks that is the solution?
you mean the miracle of endless immigration has not sparked massive growth?
Massive growth is not the objective. Squeezed wages and endless house price growth are the way that particular ponzi scheme works.
Following the same broken model for the past 35 years isn’t going to deliver growth. The British economy is now circling the drain.
If the state of the British economy is so parlous, how come every one of my neighbours here in a moderately prosperous London suburb is still collecting tens or hundreds of £thousands in entirely unearned property wealth. Every. Single. Year? Another £1.5 trillion just since the pandemic, according to the ONS.
Meanwhile we’re told that more taxes have to be piled on to working people, small businesses and farmers – ie: productive people – to keep the state dependent middle class gravy train rolling.
Until we elect someone who’s actually prepared genuinely to tackle mass immigration and the bad incentives in the tax system nothing will change.
Labour’s problems are multiform…
Add another three other glaring governing afflictions. The lack of experience, the clear lack of basic ministerial competence and the complete absence of leadership quality. Relegation zone characteristics…
Officially counted immigration will increase the UK population by between 0.6% and 1% this year. Such rapid population growth and anaemic economic growth of only 0.75% will result in stagnant or falling living standards.
In purchasing parity terms, UK per capita GDP has been in recession for nearly 2 decades. We all feel poorer because we are. And as GDP per capita shrinks, public services become ever more unaffordable.
In 2007, purchasing power adjusted GDP per capita was just over $50k in the UK and just shy of $49k in the USA. In 2024, the UK’s was $49k and the USA’s was $81k. While Asia and the USA continued improving living standards, European and Canadian “liberals” have delivered the longest period of falling living standards in two centuries.
So Liz Truss was right?
Inflation is likely to stay higher that the BOEs 2% target, especially with a global tariff war, and prospect of stagflation, could go above 4% so rates will stay quite high.