Are things bound to get better? For Sunak and the UK economy, this may be as good as it gets | Economic growth (GDP)

When you're about 20 points behind in the polls, calling for an election before it's needed is a high-risk strategy. But Rishi Sunak decided that holding out until the autumn was a bigger gamble. The economy determines elections, and as far as the Prime Minister is concerned, this may be as good as it gets.

Sunak has only recently come to this view. After falling into a shallow recession at the end of 2023, the economy has just returned to growth. Living standards, which had been hit hard by the cost of living crisis, are recovering. Inflation fell to 2.3% from a peak of 11.1% in October 2022, just above target.

But the economy had just turned a corner and there was a strong case for a long-term play to allow the government to provide further evidence of a recovery. Chancellor Jeremy Hunt thought so too and the Treasury was already making plans for a statement in the autumn before the election. Plan A was for the Chancellor to announce National Insurance Contribution (NIC) cuts in September, allowing Sunak to announce the November election date at the Conservative Party conference.

That plan has now been scrapped. Plan B involves persuading voters that the budding recovery is real and that Britain's hard-won stability – a phrase Sunak will use repeatedly during the election campaign – will be jeopardized by a Labor victory. So what has changed?

First, some of the recent news has been better than expected. The growth rate for the first three months of 2024 was 0.6%, and the survey showed improvement expected to continue in the second quarter. Both business and consumer confidence rose. The International Monetary Fund (IMF) said in its annual assessment of economic conditions that a deep recession had been avoided and a soft landing was expected.

Second, the latest annual inflation figure was not as good as expected by the Bank of England and financial markets, plummeting from 3.2% in March to 2.3% in April. Headline inflation is expected to remain close to the government's 2% target in the coming months, but is likely to start rising moderately in the fall. Services sector inflation, which the bank closely monitors as a proxy for price pressures generated by the domestic economy, has proven difficult to change and remains at 5.9%.

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Accordingly, banks are expected to be cautious in lowering interest rates. A speech this week by Ben Broadbent, one of the deputy governors, appeared to point to a cut in borrowing costs in June, but the tone changed when inflation figures were released. The city now sees little chance of a rate cut next month and only a 50% chance of a rate cut at the Bank's next meeting of its monetary policy committee in early August. This will have a knock-on effect on mortgage rates, hurting people whose fixed-rate mortgages expire this year. The longer Sunak delays the election, the more households will be affected.

Third, the state of our public finances leaves no room for tax cuts this fall. The IMF gave the government good news, but said there was no room for giveaways and pointed to a looming $30 billion hole that actually needed to be plugged.

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The IMF's warning was further underlined by the latest Office for National Statistics figures showing the government borrowed more than $20 billion more in April than in April last year, more than the independent Office for Budget Responsibility had predicted at the time of the March budget.

In short, any hope that households would benefit from the multiple cuts in mortgage rates before the election has been dashed. Hunt was forced to recognize that he had no money for tax cuts. By recent standards, the economy is doing tolerably well. Then why wait?

Sources 1/ https://Google.com/ 2/ https://www.theguardian.com/business/article/2024/may/22/things-can-only-get-better-sunak-uk-economy-this-might-be-as-good-as-it-gets The mention sources can contact us to remove/changing this article

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