The Bank of England has warned that the UK economy is likely to see no growth following the Chancellor’s recent Budget, as businesses react to record tax increases by raising prices and reducing staffing levels. Policymakers now expect the economy to flatline in the final quarter of 2024, a downgrade from their earlier forecast of 0.3% growth. This follows concerning figures that showed a contraction in output in October, raising fears of a looming recession.

While the Bank’s Monetary Policy Committee (MPC) voted to keep interest rates at 4.75% on Thursday, Governor Andrew Bailey acknowledged the uncertain outlook. He stressed that the Bank cannot commit to future rate cuts at this stage due to ongoing uncertainties stemming from the Budget’s measures.

Analysts have cautioned that both households and businesses may face continued cost pressures into 2025, with inflation remaining persistent despite subdued economic growth. A recent Bank of England survey found that an increasing number of households expect economic stagnation to become the norm. “There was a common view that the UK was moving from a cost-of-living crisis to a prolonged period of higher costs and lower living standards,” the report stated.

Businesses have reacted to the Chancellor’s decision to raise employers’ National Insurance contributions by £25bn, a move that is expected to keep inflation elevated for longer. Many companies have opted to increase prices instead of reducing wages, while also scaling back on recruitment and working hours to cope with rising costs.

Prime Minister Rishi Sunak acknowledged that improving living standards “will take some time” and “won’t be fixed by Christmas.” Chancellor Jeremy Hunt defended the Government’s approach, claiming that low-income families are already feeling the benefits of recent measures. However, the Bank’s survey painted a more cautious picture, with many households feeling that official commentary on economic recovery did not align with their lived experience of high day-to-day costs.

The Bank of England noted that the National Insurance hike is “weighing heavily on sentiment” among businesses, dampening their optimism about a swift economic recovery. Consumer concerns have also extended to the housing market, where the Bank observed that many buyers are now reluctant to make significant financial commitments.

Economists at Citi warned that price increases planned for next year could keep inflation stubbornly high, while analysts at HSBC suggested that the UK could be drifting towards stagflation, justifying higher interest rates even if growth slows and unemployment rises.

Minutes from the MPC’s latest meeting revealed differing views among policymakers on the long-term effects of the Budget. While three members supported an immediate rate cut, the majority, including Governor Bailey, remained cautious, noting that inflationary pressures are still too uncertain to allow a quick policy shift. Market expectations are now leaning towards a possible rate cut in February, although Mr. Bailey emphasized that any reduction in borrowing costs would be gradual to ensure the 2% inflation target is met.

Businesses have expressed surprise at the scale of the National Insurance rise, particularly the reduction in the threshold at which employers must start paying. Many expect the increase to drive up labour costs, especially in sectors that rely on part-time or lower-paid staff. In response, some companies are considering investing in automation or relocating operations abroad to mitigate rising costs and maintain competitiveness.

Shoe Zone, the UK-based footwear retailer, has attributed its latest wave of store closures to cost pressures triggered by the UK government’s October budget. The Leicester-headquartered chain, which employs approximately 2,250 staff across 297 stores, cited higher national insurance contributions and an increase in the minimum wage as key factors pushing some of its outlets past the point of financial viability.

In a statement outlining “very challenging trading conditions,” Shoe Zone highlighted several contributing factors: reduced consumer confidence following the Chancellor’s budget announcement, weaker-than-expected spending, and poor weather conditions that negatively impacted footfall. As a result, the company revised its profit expectations for the financial year ending 27th September 2025, lowering its forecast to “not less than £5 million” — half of its original target of £10 million.

“This year’s budget, announced by Rachel Reeves in October 2024, has intensified cost pressures and impacted consumer sentiment,” the company said. “As a result, certain stores can no longer be maintained.” Additionally, Shoe Zone confirmed that it would not pay a final dividend for 2024, a move that added to investor concerns.

The news led to a sharp decline in the retailer’s stock price, with shares falling by 38.5% to 85p. This drop caps a difficult year for the company, with its stock price having fallen by two-thirds over the past 12 months.

Founded in 1980, Shoe Zone is known for offering budget-friendly footwear, with an average price of £13.30 per pair. The retailer operates a mix of high street, retail park, and online outlets. Despite its ongoing efforts to close loss-making stores — having shut 26 branches in the last financial year — management had hoped that measures like store refurbishments and larger-format outlets would help stabilize or improve performance.

However, the unexpected increase in wage and tax costs has accelerated the closure process. Although the company did not specify the number of additional closures, it is clear that Shoe Zone is taking a more defensive stance amid economic challenges.

Analysts have expressed mixed opinions on the company’s decision to link the closures to the budget. Some questioned the rationale, noting that footwear is typically considered a non-discretionary purchase. Others, however, acknowledged Shoe Zone’s history of prudent cost management and suggested that the retailer is simply taking a cautious approach, choosing not to subsidize loss-making stores in such uncertain times.

Zeus Capital offered a more positive outlook, citing the company’s strong fundamentals, including zero financial debt and a track record of restoring dividends when conditions improve. While investors face short-term challenges, Shoe Zone’s swift response to economic pressures may ultimately benefit its long-term prospects.