The UK economy grew 0.2 per cent in September. This followed 0.1 per cent growth in August, revised downwards from 0.2 per cent. Monthly figures don’t always tell a story on their own, but these past two months of data reflect the UK economy’s trend for the year – one, unfortunately, of virtually no growth.
The provisional Q3 figures are out this morning as well, showing no economic growth between July and September. A tiny 0.1 per cent uptick in the services sector was offset by a small fall in construction output, which has led to a flatlining economy. Compared with the same quarter in 2022, GDP has increased by 0.6 per cent, but the government’s pledge to get the economy growing this year looks like it has fallen flat, as no meaningful growth figures have been conjured up yet.
If there’s any good news, it’s that the economy continues to avoid a technical recession. Both September’s figures and the provisional Q3 figures came in stronger than the consensus believed they would. The expectation had been that both would show a 0.1 per cent contraction.
Growth data has not been wholly reliable recently and the economy continues to outperform doomsday scenarios like the ones produced by the IMF, which predicted the UK would be the only G7 country to fall into recession this year. While the figures for Q3 could be revised downwards, today’s update is more evidence that the UK will manage to stave off a technical recession this year.
But don’t expect talk of a recession to dial down. If anything, it’s likely to ramp up in the coming weeks as consumer spending is carefully monitored in the lead up to Christmas. Rising interest rates are designed to take some heat out of the economy and reduce spending. The result eventually is a lower inflation rate, but, as we’ve seen in the Eurozone too, it also results in lackluster growth figures. It’s a tightrope act performed by central banks, which are trying to bring inflation back to target while also not tipping the economy into recession.
Today’s news helps to vindicate the Monetary Policy Committee’s decision last week to hold rates at 5.25 per cent for a second time, though there are still some on the committee voting for another rate hike.
As Capital Economics points out this morning, the situation is tricky to manage. While economic growth is clearly feeling the weight of higher rates, the economy is still ‘not weak enough to reduce core inflation and wage growth quickly’. This suggests that, even with rates so much higher than they were two years ago, inflation in the UK is persistent enough that it’s still taking a while for rate rises to be fully felt. ‘As such, we don’t expect the Bank of England will be able to cut interest rates until late in 2024 rather than in mid-2024 as widely expected,’ says the forecaster.
In response to the no-growth update this morning, Chancellor Jeremy Hunt is insisting that ‘the Autumn Statement will focus on how we get the economy growing’. He noted as well that ‘high inflation is the single greatest barrier to economic growth’.
Indeed, the tools that bring down inflation (like higher interest rates) can take their toll on GDP figures, which require public policy to be even more innovative and focused on supply-side reforms to stimulate growth. Given the government’s aversion so far to these kinds of reforms, particularly around planning, the worry remains that small tweaks will be billed as substantial change.
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