UK economy stagnates in Q3 as high rates bite
THE UK economy flatlined in the third quarter, reducing the risk of a 2023 recession. But the stagnation suggests that Britain is facing a protracted period of stagnation as higher interest rates take their toll.
GDP was unchanged from the second quarter, the Office for National Statistics said on Friday (Nov 10). Economists surveyed by Bloomberg had forecast a 0.1 per cent decline on average. In September alone, GDP rose 0.2 per cent.
A quarter of stagnation had been predicted by the Bank of England (BOE), which expects the economy to register no growth at all next year. Consumer spending, business investment and government spending all fell in the third quarter, leaving the economy underpinned by a better trade performance
That is a bleak prospect for Prime Minister Rishi Sunak as he gears up for an election expected next year. Polls put the ruling Conservatives on track to lose power to the opposition Labour Party.
It may also help to convince BOE policymakers they have done enough to bring inflation under control after raising interest rates from 0.1 per cent to 5.25 per cent in less than two years.
The central bank’s chief economist Huw Pill signalled as much in an address on Thursday, after the central bank downgraded its growth outlook last week. However, both he and governor Andrew Bailey have stressed the need to keep borrowing costs in “restrictive” territory for an extended period to bear down on underlying price pressures.
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Traders are betting that rates have peaked, with the BOE expected to begin cutting rates from August next year.
The UK economy faced headwinds on several fronts in the third quarter. Public-sector strikes hit schools and the health service, while retailers suffered from wet weather in July and unseasonably warm temperatures in September that led consumers to put off buying autumn and winter clothes. Hanging over everything was the squeeze of higher borrowing costs.
The central bank also predicted growth of 0.1 per cent in the fourth quarter and flatlining through 2024. However, some economists think that is optimistic, given that around half the monetary tightening since 2021 has yet to be felt.
Figures next week are expected to give the BOE further reason to pause, with inflation forecast to drop below 5 per cent from 6.7 per cent in September while wage growth holds close to 8 per cent – well above the level compatible with the 2 per cent inflation target.
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