HAMISH MCRAE: I hope to hear a lot about the ‘R word’ next year

I’m afraid there is no Christmas cheer this year. We have just had a terribly bad few days both financially and economically. The Footsie have lost more than 200 points, making it the worst week in over a year, but that is just the outward sign of a much deeper malaise.

The Bank of England now expects zero growth for the final three months of this year, much worse than its previous forecast. Inflation is rising unabated: the consumer price index (CPI) stands at 2.6 percent and is expected to exceed 3 percent next year.

The Government’s preferred measure of inflation, the CPIH, which takes into account the cost of housing for owner-occupiers, is 3.4 per cent. The 10-year bond yield is now well above 4.5 percent, the highest this year. If the government has to pay more to borrow, so do the rest of us: higher bond yields raise the interest on fixed-rate mortgages. Retail sales remain stable, with a year-on-year increase of just 0.5 percent in November. And business confidence is at its lowest level in two years.

The inflation outlook is particularly concerning, as many of the upcoming price increases are the result of government actions or are indexed to past inflation as measured by the Retail Price Index (RPI).

For example, Londoners have just been informed that their tube fares will rise by 4.6 per cent in March, “in line with increases in national rail fares across the country”.

Putting VAT on private school tuition and increasing vehicle excise taxes will increase the CPI by about 0.3 percentage points. And most of us continue to receive emails telling us that some service is being increased by the CPI, which at 3.6 percent is one point higher than the CPI.

This is all before higher national insurance contributions for employers come into force from April.

Companies will respond with some combination of reduced margins, higher prices, staff cuts and lower wages. But no one can know the balance between these reactions until they occur.

All we know is that the solid growth of the first half of this year has stalled. And although I haven’t seen any forecasts yet, I don’t think we should rule out the possibility of a recession next year. I hope we don’t get there, but I expect to hear a lot more about the R word in the coming months.

There is a temptation to blame all this on Rachel Reeves’ budget and, more generally, the way in which this new Government has allowed spending to exceed previous projections.

Tax revenues have held up quite well. The fiscal pressures it faces come mainly from the spending side. But while the Chancellor has been extraordinarily inept – the most basic rule, if you want to encourage growth in an economy, is not to go around destroying it – the global outlook has contributed to the headwinds.

The biggest concern is rising bond yields around the world. My colleague Alex Brummer has pointed out that the gap between German and UK government bond rates is the highest it has been in 35 years. This is a brutal comment on the relative creditworthiness of the German government and ours. But I think our biggest difficulty is what is happening in the United States.

Ten-year U.S. Treasuries also traded above 4.5 percent on Thursday and Friday, responding to the Federal Reserve’s caution about inflation pressure and the pace at which it could make further rate cuts. of interest.

A couple of weeks ago markets expected the Federal Reserve to cut its target by three or four percentage points. Now only two are waiting. If the Trump Administration wants to borrow on a large scale, as seems very likely, that will push US bond yields even higher.

The effect of all this – an inept Chancellor, rising inflation, higher taxes, no significant fall in the cost of money, weak consumer demand – is that much of British business is going into survival mode.

In the long term, the UK’s prospects look quite good, much better than in Germany or France, but the message of the last few days from our business community is that next year will be even more difficult than previously thought.