UK economy stagnates as interest rate rises start to bite
Although the UK’s economic performance was slightly better than economists had expected in Q3, a contraction is expected in Q4, with potentially a shallow technical recession in early 2024.
Authors
Economic activity in the UK was flat in the third quarter according to preliminary estimates from the Office for National Statistics. Quarterly real GDP growth slowed from 0.2% in the second quarter, although the latest reading was slightly better than consensus expectations of a 0.1% decline. On a quarterly year-on-year basis, GDP growth was unchanged at 0.6% from the previous quarter.
Examining the details of the data reveals a weaker outlook, likely to be impacted by the aggressive rise in interest rates over the past year. Total household spending fell by 0.4% over the quarter adjusted for inflation, with most of the cutbacks happening with goods (-0.8%) rather than services. Although the same quarter a year earlier was even weaker (-0.9%), this was impacted by an additional public holiday and would have distorted the data negatively.
Total investment in the economy fell by 2% in the third quarter, dragged down by private business investment (-4.2%) but partly offset by government investment (4.3%). Business investment was up 8.3% in the previous quarter compared to the end of last year, and so the latest pull-back was not a total surprise. However, private business surveys suggest widespread pessimism over the economic outlook and plans to cut back on spending and investment. We expect to see further declines in private capital expenditure in the coming quarters while business confidence remains low.
There was a small (0.4 percentage point) positive contribution from net trade – the first in a year. However, this was largely due to a decline in imports (-0.8%) rather than strong exports (+0.5%), reflecting weaker domestic demand.
Alongside the growth estimates for the third quarter, monthly figures for September were released. These showed economic activity growing by 0.2%, more than consensus expectations of no growth. Services and construction activity both grew although industrial production was flat.
Overall, the latest reading on the UK economy was slightly better than economists had expected, but not materially so to change the outlook for monetary policy. The Bank of England has warned that interest rates are likely to remain elevated for a prolonged period of time, as inflation has proven to be higher and stickier than expected. The economy is expected to contract in the final quarter of the year, potentially going into a shallow technical recession in early 2024.
Important information
This communication is marketing material. The views and opinions contained herein are those of the named author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.
This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy.
The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.
Past Performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall.
Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.
The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors.
Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.
Authors
Topics