**********The UK economy may shrink by 0.1% in the fourth quarter of 2024. If the data is true, it will mean two consecutive quarters of negative growth, officially plunging the UK into a technical recession. The Bank of England (BOE) previously predicted a 40% chance that the UK economy has fallen into recession. This economic weakness, coupled with UK Chancellor of the Exchequer Rivers' tax increase policy, has intensified market concerns about the future growth prospects of the UK.

The government's financial pressure is intensifying

The UK government is currently facing a dual dilemma: on the one hand, the government's borrowing costs are close to the level of the United States, while the economic growth rate is comparable to that of the eurozone. The yield of British treasury bond bonds is as high as 4.5%, but the actual economic growth rate is only 0.7%, which is in sharp contrast to the growth level of the United States of America, which is nearly 3%.

In addition, the proportion of UK debt to GDP has reached the highest level since the 1960s, triggering investors' concerns about fiscal sustainability.

Unless the government can reduce its massive fiscal deficit, market concerns about the sustainability of public debt will continue to increase. "- Ruth Gregory, Deputy Chief UK Economist at Capital Economics

EY Item Club's calculations show that UK borrowing costs are at a relatively high level compared to their nominal growth rate in developed economies. This means that if the government continues to support fiscal spending through borrowing without boosting economic growth, the fiscal deficit may further widen.

Economic growth prospects are sluggish, and Reeves faces policy difficulties

Faced with an economic downturn, Reeves had promised to promote infrastructure investment, including the construction of new wind farms, roads, airports, railways, and more. However, economists point out that these projects are difficult to drive economic growth in the short term, and coupled with the pressure of fiscal austerity faced by the government, the feasibility of investment plans is uncertain.

We are surprised by the recent economic weakness, and if economic activity continues to be sluggish, the UK may officially enter a technical recession in the winter. "- Economists Dan Hanson&Ana Andrade

In addition, the Bank of England cut interest rates for the third time at last week's meeting and lowered its 2025 economic growth forecast to 0.7%. It is also expected that rising energy prices will push up inflation, making future monetary policy more complex. Bank of England Governor Andrew Bailey emphasized that further interest rate cuts will be implemented in a "gradual and cautious" manner. This position is interpreted by the market as having only two to three interest rate cuts in 2025.

Policy impact: Increased risk of fiscal tightening

The fiscal review agency is expected to lower its economic growth forecast in the spring fiscal statement on March 26th. The previous forecast adjustment has led to the almost disappearance of Reeves' fiscal buffer space. The market is concerned that if economic growth continues to weaken, the government may have to cut public service and welfare spending to maintain fiscal discipline.

At present, Reeves has promised not to further increase taxes in the short term, but if the economy continues to be sluggish, the pressure to cut government spending will further intensify. Given the rising cost of UK debt, the market has begun to question whether the government has enough policy tools to cope with the possible future recession.

The growth rate of the UK economy is much lower than the cost of borrowing, which is not common in developed economies, except for Italy where the situation is similar to that of the UK. "- Peder Beck Friis, PIMCO economist

Edit viewpoint

The current economic policies in the UK are facing great challenges. On the one hand, the tax increase measures have had a negative impact on business and consumer confidence, suppressing short-term growth; On the other hand, the rising cost of government debt limits the room for fiscal policy adjustments. If the UK economy continues to be sluggish, Rivers may have to make a choice between cutting spending and adjusting tax policies.

In the future, the UK government needs to balance short-term fiscal discipline with long-term economic growth goals. If a balance cannot be found between stimulating the economy and controlling the fiscal deficit, the UK may face more persistent growth challenges.