UK economy grows less than forecast, consumer spending shows signs of weakening

[LONDON] The UK economy grew less than the Bank of England (BOE) forecast, and consumer spending showed signs of weakening, leaving the chances of a rate increase in December in the balance.

Gross domestic product (GDP) rose 1.3 per cent in the third quarter, short of the 1.5 per cent predicted by the central bank this month. A stronger-than-expected 0.6 per cent gain in September alone was marred by evidence that consumers are cutting back as accelerating inflation eroded living standards.

A December rate increase had been largely priced in by markets after officials warned last week that higher borrowing costs will be needed in coming months to bring inflation back to their 2 per cent target. Labour market data will be crucial to their decision, with policymakers looking to see how some 1 million furloughed workers fared when the government stopped subsidising their wages on Oct 1.

"The recovery has entered a much tougher phase," said Martin Beck, economist at the EY Item Club, which uses the Treasury's forecasting model. "The situation has been made harder by the escalation of supply chain disruption and the increases in inflation, which will eat into household spending power."

The growth shortfall in the third quarter was due to the Office for National Statistics (ONS) revising lower data for July and August figures. The BOE had been expecting an expansion of 1.5 per cent. Output was 2.1 per cent below its level before the pandemic struck, lagging behind other Group of Seven economies.

"Beyond the strong headline figure, the composition of growth was more concerning," said Thomas Pugh, economist at RSM UK, a tax and consulting firm. "The economy is likely to slow in the fourth quarter as supply shortages, surging prices and the removal of fiscal support weighs on consumption."

Service industries grew 0.7 per cent due to an increase in output from the health sector as many doctors resumed face-to-face appointments. However, consumer-facing services fell 0.6 per cent on weaker retail sales. That may fan BOE concerns that demand is waning as households brace for a sharp increase in energy bills and taxes in the spring.

Manufacturing fell in the month on a drop in vehicle production, which declined the most since May because of widespread shortages in the supply chain. The fall was offset by a increase in construction output.

Separate figures on trade showed the trade deficit excluding precious metals widened to almost £40 billion (S$72.6 billion) in the third quarter. Exports fell more sharply than expected, and imports rose.

"UK exporters face a difficult winter ahead as supply disruption shows little sign of easing, with profits squeezed as a result," said Ana Boata, head of economic research at trade credit insurer Euler Hermes.

BLOOMBERG