Brace yourself for tougher times ahead – and hear a lot more about the recession: HAMISH MCRAE

I’m afraid there won’t be any Christmas spirit this year. We have just had a few blisteringly bad days, both financially and economically. The Footsie has lost more than 200 points, making this its worst week in more than a year, but that’s just the outward sign of a much deeper malaise.

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

The government’s preferred inflation measure, the CPIH, which takes into account the cost of housing for owner-occupiers, is 3.4 percent. The yield on ten-year government bonds is now over 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 drive up interest rates on fixed-rate mortgages. Retail sales remain flat, up just 0.5 percent year-on-year in November. And business confidence is at its lowest point in two years.

The inflation outlook is particularly worrying because many of the coming price increases are either the result of government action or are indexed to past inflation, as measured by the Retail Price Index (RPI).

For example, Londoners have just been told that their Tube fares will rise by 4.6 per cent in March, ‘in line with national rail fare increases across the country’.

Imposing VAT on private school fees and increasing vehicle excise taxes will increase the CPI by about 0.3 percentage points. And most of us continue to receive emails saying that some service is being increased by the RPI – which at 3.6 percent is a full point higher than the CPI.

All this before higher national insurance contributions for employers come into effect from April.

Companies will respond with a combination of tight margins, higher prices, workforce reductions and lower wages. But no one can know the balance between these responses until they strike.

All we know is that the solid growth of the first half of this year has stalled. And while I haven’t seen any predictions about that 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.

The temptation is to attribute this all to Rachel Reeves’ budget, and more generally to the way this new government has accelerated spending ahead of previous expectations.

Tax revenues remained at a reasonably good level. The fiscal pressure it faces lies mainly on the expenditure side. But while the Chancellor has been singularly inept – the most fundamental rule, if you want to encourage an economy to grow, is not to destroy it – the global outlook has added to the headwinds.

The biggest concern is rising bond yields worldwide. My colleague Alex Brummer has noted that the difference in interest rates on German government bonds and British government bonds is the largest in 35 years. That is a bold comment on the relative creditworthiness of the German government and our own. But I think our biggest difficulty is what’s happening in the US.

U.S. 10-year Treasury yields also traded above 4.5 percent on Thursday and Friday, responding to the Federal Reserve’s caution about inflation pressures and the pace at which it could further cut rates.

A few weeks ago, markets expected the Fed to cut rates by three to four quarters of a percentage point. Now they only expect two. If the Trump administration wants to borrow a lot, which seems very likely, that will further increase US bond yields.

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

In the long term the prospects for Britain look quite good, much better than in Germany or France, but the message from our business community in recent days is that next year will be even more difficult than expected.