Consciousness of Sheep
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We have reached that moment in the life of a government when they attempt to claim everything positive is down to them, while everything negative is down to the previous administration. I refer to the economic data rollercoaster of the past week or so. Most troubling – at least if you believe the establishment media – was the apparent return of inflation… even though it wasn’t inflation. But it is hard to blame the fast fading Tories having previously taken the credit for the supposed return to growth the week before.
It would be wise for government and opposition spokespeople to avoid claim or blame in this instance, because both the 0.7% GDP growth rate and the 3.5% “inflation” figure were completely at odds with broader economic data in recent months. Unemployment returned in the first quarter, and job vacancies – already inflated – plummeted. Insolvencies were up while business confidence slumped. And yet, magically, first quarter GDP appeared to be on course for a respectable 3.5% for 2025. Did we all miss something?
Alas, no. Dig behind the headlines and the commentary offered by the Office for National Statistics, and a different story emerges. The inflation adjusted GDP apparently grew by £4.5bn over the quarter. Within this figure is a one-off increase of £2.4bn from exports to the USA ahead of Trump’s tariffs. This might suggest an increase in trade with the USA, but it is more likely an attempt to beat the tariffs by bringing forward anticipated exports for the rest of the year. That is, trade with the USA is likely to register negative growth in the next couple of quarters. Almost all of the remaining growth came from “business investment capital formation” that allegedly grew by £3.7bn, which, together with the rise in exports to the USA, is greater than the reported GDP growth – or, put another way, without this one £3.7bn source of growth, GDP would have been negative.
This is where the smoke and mirrors come in, because “business investment capital formation” actually fell by £1.5bn in the first quarter of 2025. However, for obscure reasons, the statisticians at the ONS decided to “seasonally adjust” (i.e., fiddle) the number upward, magically converting a £1.5bn loss into a £3.7bn gain and, perhaps, giving Rachel Reeves a boost ahead of a likely summer reshuffle.
Inevitably, this latest GDP number will be revised downward – as have most of the UK’s quarterly GDP figures since the pandemic. Unfortunately, the 3.5% “inflation” number will not… even though “gougeflation” would be a more accurate term, the Bank of England is sure to leave interest rates on hold, if not raise them, even though the increased prices have absolutely nothing to do with consumer spending or borrowing. Indeed, food prices were the only private sector increases within the data.
The big anomaly was a massive 27.5% increase in airfares. This though, was a distortion resulting from a late Easter (when demand for flights is high and prices are raised accordingly). But the main cause of the increase came from monopoly energy and water utilities gouging consumers with above inflation increases. Council tax and business rates also rose above inflation – the former affecting consumers directly, the latter inevitably being passed on as higher prices (including increased rents from private landlords) by businesses that are facing bankruptcy as a result of government tax increases and the above inflation rise in the Minimum Wage.
Notably, while unaviodables like tax, rents, energy, water and food continue to increase in price, the discretionary sectors of the economy saw big price reductions, as higher costs can no longer be passed on to consumers without crushing demand. And this is before the impact of tax and wage increases hit home (although some employers are already reducing hours and laying off staff in anticipation).
A more accurate indicator of the true state of the UK economy was seen in the Confederation of British Industry’s survey of manufacturers, which recorded the biggest slump in orders since August 2020. As Reuters explained:
“The report followed on the heels of S&P Global’s survey of the manufacturing sector, which showed a severe downturn marked by the fastest pace of job cutting since the onset of the COVID-19 pandemic five years ago…
“Businesses are facing pressure from high energy costs, rising labour costs and the threat of extra regulation with the government’s Employment Rights Bill coming down the track…”
With the UK government concerned to plug holes in its borrowing forecasts, and with some, at least, on the Monetary Policy Committee convinced that inflation is the bigger enemy, the UK’s businesses and consumers may well be hit with yet more taxes and higher interest rates just at the point when the economy slumps hard… after which, it is hard to see a credible policy package to halt the downturn, still less restore any meaningful growth.
As you made it to the end…
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