Surprise growth could bring four interest rate rises next

UK economy jumps 0.4% – now comes the nasty bit

Surprise! Britain's economy grew by 0.4% in July, comfortably beating expectations and giving the Government some desperately needed good news. But small businesses shouldn't celebrate just yet. Stronger growth could make the Bank of England more comfortable about raising interest rates, with some City economists reportedly expecting as many as four increases over the next year. Growth is welcome. Growth followed by higher borrowing costs is rather less so.

THE ECONOMY GREW

Surprise!!!!! 0.4% growth in July. Analysts are shocked and the growth is welcome. However, the real test is what happens next and it is possible that what does happen next is interest rate rises.

The Bank of England is expected to hike interest rates as many as four times within the next year according to those in the City who think they know. The Bank is expected to be buoyed by this morning’s GDP figures and economists are now predicting he’ll keep rates as they are next week but raise them in November. 

Going Up

The UK economy delivered a surprise boost in July, the month Andy Burnham entered No 10, with GDP rising 0.4%, far ahead of forecasts. Services led the charge with 0.4% growth, powered by strong performance in computer programming, AI‑driven firms, and parts of the digital economy. Production ticked up 0.2%, construction 0.1%.

The ONS said AI‑related businesses were a major driver, while the World Cup created mixed fortunes across sectors. On paper, this is good news but for small and micro businesses, the question is whether this is enough to stop an emergency Budget and stop more small firms going under

Real Risks

Global borrowing costs have surged and a global bond sell‑off has pushed gilt yields higher, slashing the amount the government has in the piggy bank to play with.

£22bn of headroom may have halved. The money that was in there could be cut in half, leaving Healey with little room to manoeuvre.

Fiscal rules are tight: Day‑to‑day spending must match tax receipts by 2030. That means very limited borrowing.

Industry leaders are demanding cost cuts. Britain’s biggest business groups have written to the Chancellor asking him to reduce the cost of doing business not raise it.

Major employers are cutting jobs. Jaguar Land Rover confirmed plans to cut thousands of roles to save £1.7bn; a sign of wider economic fragility. When that happens smaller suppliers can find themselves in the firing line and the knock-on impact on local economies is huge.

Any Change

Small businesses want to know whether the unexpected growth makes life any easier for them, and the answer it probably not.

Costs are still rising for basics like energy, rent, insurance and wages. If interest rates start to rise that makes it harder and more expensive for them to borrow.

Consumer confidence is still weak which means shoppers are cautious, footfall is patchy and discretionary spending is fragile. An interest rate hike makes consumer borrowing like mortgages more expensive cutting the amount they can spend even further.

Fiscal pressure may force tax rises elsewhere. The Chancellor has ruled out increases to income tax, VAT and national insurance. That leaves other taxes, and that could include the taxes that affect small businesses, exposed. Interest rates rises on top is the nightmare scenario.

Big employers cutting jobs signals slower demand. When major manufacturers tighten belts, supply chains and local economies feel it.

Growth is concentrated in AI and digital which is great for tech but less helpful for hospitality businesses, and micro‑manufacturers. Small businesses need broad‑based growth rather than pockets of strength.

Use Growth Wisely

In his first major speech the chancellor framed growth as the strategy, meaning tax rises, austerity and emergency measures aren’t the strategy. There’s still noise about the possibility of the necessity for an emergency budget despite the unexpectedly good figures.

The Chancellor has promised to boost growth “in more places”, signalling a focus on regional economies, high streets, and local business ecosystems. For small and micro businesses, that could bring opportunity but to cash in on it they need:

·         lower employer costs

·         targeted support for energy bills

·         investment in local infrastructure

·         better access to finance

·         stability in tax policy

·         support for digital adoption

·         stronger local procurement

·         and lower interest rates.

If the Chancellor uses July’s growth as a platform, small businesses could get some of the breathing space they need.

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Not Enough

The economy grew and that’s good news, but it’s not enough to save small and micro businesses from the risk of an emergency Budget, or another year of rising costs, especially if the soothsayers are right about the possibility of 4 interest rates rises in the next 12 months. Growth is welcome but unless it reaches the high street and local businesses it won’t be enough.

The next Budget will decide whether this surprise growth becomes a turning point or just a brief pause in a difficult year.