Economy ground to halt ahead of election: Government set to borrow £100bn more than expected over next five years
Political uncertainty ahead of the General Election has left the economy facing its worst month for more than three years.
Activity in the dominant services sector hit a nine-month low this month and factory output fell at the sharpest rate for seven years, according to research group IHS Markit.
In a further blow to Boris Johnson, the official Treasury watchdog said the Government was on course to borrow almost £100billion more than expected over the next five years.
Extra borrowing could leave Chancellor Sajid Javid short of cash to fire up the economy – though it is hoped that the Tory election victory will unleash a wave of investment in the UK
Analysts warned that would leave his Chancellor Sajid Javid short of cash to fire up the economy – though it is hoped that last week’s crushing Tory victory will unleash a wave of investment in the UK.
The FTSE 100 index rose 2.25 per cent, or 165.61 points, at 7519.05 on its best day for a year as investors cheered the end to political stalemate in Westminster.
With the FTSE 250 up another 1.92 per cent, or 412.9 points to 21,920.69, the ‘Boris bounce’ has added £82billion to the value of Britain’s leading companies in the two trading days since the Tories secured their majority.
Thomas Pugh, an economist at Capital Economics, said a Brexit deal, extra government spending and possible tax cuts may boost the economy early next year.
‘There are some reasons to expect things to pick up,’ he said. ‘But if there isn’t a pick-up then the Bank of England may help out by cutting interest rates.’
Markit said its index of activity in the UK – where scores below 50 show decline – fell from 49.3 in November to 48.5 in December.
That was the weakest score since July 2016 when the Brexit vote the previous month hit confidence.
The service sector racked up a score of 49 this month, its worst performance since March, while the barometer for manufacturing output fell to 45.8, the lowest level since July 2012.
Chris Williamson, chief business economist at Markit, said the figures ‘sadly lacked festive cheer’.
He added: ‘The latest decline was the second largest recorded over the past decade, and increases the likelihood that the economy contracted slightly in the fourth quarter as Brexit-related uncertainty intensified in the lead up to the General Election.’
The Office for Budget Responsibility said government borrowing would be around £20billion a year higher than previously thought due to changes in accounting, particularly for student loans.
Jack Leslie, economic analyst at the Resolution Foundation, said the OBR statement ‘provides a sobering warning to returning government ministers that the UK’s economic outlook is far less clear and rosy than the political outlook’.
Duncan Brock, director at the Chartered Institute of Procurement & Supply, said: ‘Any vestiges of hope are now pinned on the election results as the potential for reducing uncertainty may restore confidence in the months ahead.’