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Monday, Aug 04, 2025

UK economy risks heading into reverse unless Rishi Sunak offers more help

UK economy risks heading into reverse unless Rishi Sunak offers more help

Analysis: growth was weakening before Omicron emerged to put more pressure on businesses and homes
Restaurants suffered a sharp drop in activity, manufacturers reported zero growth, and output in the construction industry collapsed in October at the fastest rate since the first wave of Covid-19 last year.

Even before the emergence of the coronavirus Omicron variant, Britain’s economy was displaying worrying signs of weakness that are hard to ignore. According to the latest official figures for October, gross domestic product barely rose on the month, with an unexpectedly sluggish 0.1% growth rate.

Suggesting the rapid recovery from lockdown risked stalling entirely amid supply constraints and a dwindling of consumer appetite, activity in the food and beverage sector fell by 7.5%, while construction slumped by 1.8%.

Worse is yet to come. With tighter government restrictions and consumers reacting with caution above and beyond the official rules, the big fear is the October growth snapshot might be as good as it gets for several months to come.

Hospitality firms are warning of a slew of cancelled Christmas parties and a fall in people eating out since news of the Omicron variant first broke, while tour operators and airlines report a dip in winter holiday bookings. Work from home orders will inevitably lead to a drop in spending in town and city centres, hitting consumer-facing businesses hardest.

On the positive side, the latest figures show the economy is within a hair’s breadth of its pre-Covid position, at only 0.5% below February 2020 levels. The new restrictions announced so far remain relatively light-touch, while there are hopes that tougher measures may not be required, thanks to steady progress with the vaccine booster programme.

However, pressure is clearly building on an economy that was already struggling for momentum before the new variant emerged, while there is heightened uncertainty over the next stage in a pandemic that is far from over.

Faced with these risks, the chancellor, Rishi Sunak, said he had always acknowledged there would be “bumps on the road” to recovery but the government already had in place an “ongoing £400bn economic support package” to keep the country on track.

That’s an odd way to describe a programme that has been largely dismantled over recent months, ostensibly because Sunak believed a return to economic normality was on the cards. The furlough scheme has gone, universal credit has been slashed and several tax breaks have been reversed.

Business leaders are stepping up their warnings that failure to provide renewed support measures could squander the progress made in the economy since the easing of lockdown earlier this year; especially in the sectors most exposed to the Omicron wave, such as hospitality, travel and leisure.

Despite soaring inflationary pressures exhibited this autumn, it would also be out of step for the Bank of England to raise interest rates next week. Speculation had been that Threadneedle Street would leap into action after bottling a rate rise in November. But with evidence of fading demand in the economy and the heightened uncertainty because of Omicron, waiting until early next year would seem wise.

Pressure on household budgets is, however, only likely to intensify early next year. Energy bills are expected to be ratcheted higher come April, inflation is forecast to outstrip wage growth, council tax will go up and the government’s new social care levy will be introduced.

Analysts are warning that Britain’s economy is likely to head into reverse this winter. The extent of the setback will depend on how long government restrictions remain in place, how businesses and households react to Omicron risks, and the willingness of the Treasury and the Bank to cushion the blow.
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