A difference of opinion has surely emerged between the chancellor and the governor of the Bank of England.
Last month, Rachel Reeves confidently asserted that “the economy has turned a corner” in a BBC interview. A couple of weeks later, she repeated that view. “The most recent GDP (gross domestic product) numbers, 0.7 per cent growth in the first quarter, the strongest in the G7, and recent business surveys … are very positive,” she told a Confederation of British Industry dinner. “That is good news and does show we are beginning to turn the corner.”
Andrew Bailey, however, expressed a very different view at the annual conference of another business group, the British Chambers of Commerce. “We think the UK economy will grow at a more moderate pace over the coming quarter,” he said – a view reflected by the Bank of England’s GDP forecast, which it cut in half in February to a sluggish 0.75 per cent for 2025 as a whole.
He indulged in one of his word salads when he explained his view, saying: “The unexpected strength in the first quarter was driven by strong outcomes for volatile components of GDP in the monthly figures for March.”
In layman’s terms, he was trying to say that the surge in the early part of the year was driven by one-offs – the most obvious being the unexpectedly strong performance manufacturing recorded, as firms hurried to deliver their products to the US ahead of Donald Trump’s tariffs.
Needless to say, this is a long way from Reeves’ corner. It looks more like UK plc briefly pushing down the throttle, before slamming on the brakes to avoid a nasty looking pothole on a dodgy country road filled with them.
That hole was in no small part created by Reeves’ tax rises – not just the fiscal tightening itself, but the way she chose to achieve it by taxing employment. The effect of this was there for all to see in the most recent labour market data, which showed the jobless rate jumping to its highest level in nearly four years, while the number of openings fell by 63,000.
The governor described this as a “softening” and said he was “beginning to hear a bit more evidence of adjustments through pay and employment” as a result of Reeves’ decision to increase employer national insurance contributions. That’s more Bailey-speak, which, put simply, means: the numbers were horrible.
The government has repeatedly said it wants to get more people into work. This is the stated aim of its attempts at welfare reform, including the controversial plans to reduce access to disability benefits, which resulted in a humiliating climbdown. However, its actions speak otherwise, and the labour market duly responded.
But wait, should we be so quick to believe Bailey? The Bank of England’s forecasting record is less than stellar. Its poor performance during recent spells of uncertainty led to it drafting in Ben Bernanke, the former chairman of the US Federal Reserve, to conduct a review. The results didn’t make for happy reading.
Among his findings were “deficiencies of the Bank’s forecasting infrastructure”, the use of “out of date software” and “insufficient resources… devoted to ensuring that the software and models underlying the forecast are adequately maintained”. That, coming from a fellow central banker, was pretty damning.
However, when it comes to the opposing views of the chancellor and the governor, the data still strongly favours Bailey’s argument. The economy contracted by 0.3 per cent in April, and the unexpectedly strong performance in the early part of the year looks like a mirage.
Reeves is badly in need of help from somewhere. Public finances are still a mess, and she may have to raise taxes – again. The global environment is dangerous and unpredictable, and trade barriers are being thrown about with wild abandon.
One thing that might give UK plc a much-needed shot in the arm, as Reeves tries to navigate through this sludge, would be looser monetary policy. An interest rate cut, or two – perhaps even three.
The last meeting of the Bank’s Monetary Policy Committee showed a significant minority of its rate-setters were sufficiently worried about the economy to vote for an immediate cut (the vote went 6-3). If those three retain that stance and Bailey changes his vote, it would only take one more MPC member for lower rates to arrive.
That would be just the ticket for small businesses, medium-sized businesses, and big businesses – all of which have been grappling with sharply rising costs, those internecine trade wars and, I’m sorry to say, a political class that seems to have embraced stupidity as an operating principle.
A quarter-point cut at the next meeting is a very real possibility. Very necessary, too. Because when it comes to this debate, Bailey is on the money.
