Rachel Reeves and the slow grind to growth

There’s been a torrent of economic brew-ha-ha this week, crashing across airwaves, fibre-optic highways, and every spreadsheet-laden inbox in Westminster. And no wonder. What with the Government’s first major Spending Review and the sharpest monthly GDP drop since 2023, there’s been no shortage of political theatre and market turbulence.

First, the Spending Review. This was less of a technical exercise, more of a political stage show. Forget fiscal multipliers and deficit projections — this was about who around Keir Starmer’s cabinet table gets the dosh and who doesn’t.

The headline numbers do a lot of the talking: £39 billion committed to social housing, the largest pledge in over a decade, pointing to a serious attempt to tackle a deepening supply crunch. On defence, spending was nudged up to 2.6% of GDP, with a stated trajectory toward 3%. Peace through procurement, as it were. The health and life sciences sectors also received a meaningful boost through expanded R&D allocations, subtly reaffirming the state’s reliance on private innovation to pandemic-proof the nation.

But any sense of momentum from No 11 Downing Street was undone almost immediately with the publication of April’s GDP figures. The economy contracted by 0.3% month-on-month — the worst reading since the autumn of 2023. Not great. Worse still, the declines were widespread: services fell 0.4%, production dropped 0.6%, and the only sector in the green — construction, up 0.9% — got there via quirks in the calendar and a weather-related bounce.

The drag factors? All the ones which everyone said they would be. A hike in corporation tax, rising utility bills, sticky inflation, and the shadow of Trump-era trade tension putting the wind up global markets. April was a perfect storm, with economic headwinds blowing in from both domestic policy and across the Atlantic.

So is it all doom and gloom? Not quite.

Strip away the monthly volatility, and the fundamentals are holding up better than the headlines suggest. The FTSE 100 is up 8.7% year-to-date, outperforming every other G7 equity index. Why? In part because when global capital wants somewhere boring-but-safe to ride out the storm, the UK — despite all its recent wobbles — isn’t seen, unlike America, as batshit crazy. That, it seems, is now a competitive advantage.

Meanwhile, the FTSE 250 — often a better reflection of the UK’s real economy — is also in positive territory, up 4.69% since January. Not exactly soaring, but in this climate, slow and steady counts. If current momentum holds, we’re looking at potential full-year gains of 14–17% on the FTSE 100 and 7–9% on the FTSE 250. That’s not “meh” — that’s quietly impressive.

Which brings us back to GDP.

If the markets are pricing in stability, can the broader economy deliver it? Possibly. On current trends — and assuming Reeves doesn’t get kneecapped by external shocks or internal dissent — the UK could still post 2.2% to 2.5% GDP growth by the end of 2025. That would exceed early-year forecasts, boost revenues, and delay some of the trickier tax decisions. But it rests on a knife edge.

Because here’s the gamble: Reeves has outlined the spend but hasn’t yet shown her hand on how she’ll fund it. In the absence of a tax rise (for now), she’s banking on growth. The problem? That growth depends on productivity gains which, in turn, hinge on the success of the UK’s Quantitative Tightening (QT) experiment. And that’s out of her hands.

For over a decade, the Bank of England tackled crises with Quantitative Easing (QE), “printing” money and flooding the system to keep markets liquid and households afloat. It worked — just. But it also masked underlying weaknesses. Productivity flatlined. Asset prices soared. Real wages stagnated.

Now, the tide’s going out. QT is in full swing, with the Bank quietly removing cash from the system faster than almost any other major economy. In theory, this should encourage efficiency and discipline. In reality, it also risks squeezing credit, cooling demand, and increasing unemployment.

And unemployment is the lurking spectre. Based on current trajectories, joblessness could hit 9% within two years. That’s a lot of households under pressure, a lot of disposable income pulled out of the system — and a lot of political peril. Not to mention a massive bill for the Treasury to meet in terms of dole payments to all those people out of work. Meanwhile, house prices, long buoyed by cheap money, look set to stagnate. No crash. Just a slow trudge — in cricketing terms, Geoffrey Boycott padding forward in his dull 1970’s pomp.

So where does this leave us?

In a precarious but not hopeless position. The UK economy is wobbling, not collapsing. Reeves has made a bold bet on growth. The markets are, for now, backing her. But the margin for error is wafer-thin, and the timeline to deliver is short.

In the meantime, the most important job in British politics might not be Chancellor — but confidence-builder-in-chief. The issue is, nobody can find that person.

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