SNAPSHOT2 min read

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.

10/11/2023
UK economy stagnates as interest rate rises start to bite

Authors

Azad Zangana
Senior European Economist and Strategist

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.

Subscribe to our Insights

Visit our preference centre, where you can choose which Schroders Insights you would like to receive.

Authors

Azad Zangana
Senior European Economist and Strategist

Topics

Economic views
Economics
UK
Interest rates
Follow us

Please remember that 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.

This marketing material is for professional clients or advisers only. This site is not suitable for retail clients.

Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registered Number 4191730 England.

For illustrative purposes only and does not constitute a recommendation to invest in the above-mentioned security / sector / country.

Schroder Unit Trusts Limited is an authorised corporate director, authorised unit trust manager and an ISA plan manager, and is authorised and regulated by the Financial Conduct Authority.

On 17 September 2018 our remaining dual priced funds converted to single pricing and a list of the funds affected can be found in our Changes to Funds. To view historic dual prices from the launch date to 14 September 2018 click on Historic prices.