- Flatlining economy provides a difficult backdrop for the Autumn Statement
- What will stagnant growth mean for interest rates?
What did the latest growth figures tell us?
The UK economy is flatlining. After a 0.2 per cent expansion in Q2, the economy neither grew nor contracted in the third quarter of the year, as the chart shows.
There is mounting evidence that higher rates are starting to weigh on economic activity. There was a fall of 0.4 per cent in real household expenditure in Q3, in line with a 0.7 per cent drop in consumer-facing service output as households cut back. What's more, overall services output fell by 0.1 per cent over the quarter, driven by a contraction in interest-sensitive real estate activities.
KPMG chief economist Yael Selfin is not alone in thinking that higher interest rates are starting to drag on both consumer sentiment and disposable income: “while real incomes are starting to grow as inflation eases, this is being offset by higher mortgage rates feeding through into housing costs," she said.
Is this the start of a recession?
If we are pedantic about it, then no, this is not the start of a recession. A recession is technically defined as two consecutive quarters of negative growth; in the third quarter, the economy neither expanded nor contracted, meaning we haven’t met that threshold yet. 'Stagnation' is the best description.
Capital Economics think that GDP will weaken further in the final quarter of the year. Estimates suggest that only half of the impact of higher interest rates has fed through to the economy so far, and analysts think that consumer spending and business investment figures will soon show more signs of strain. Paul Dales, chief UK economist, said that “it comes down to semantics to whether or not the economy is in recession, but we’re fairly confident it is going to be subdued for a while yet”.
But although zero growth is underwhelming, it is better than the deep recession forecast only a year ago. Nicholas Hyett, investment analyst at Wealth Club, believes the economy “remains surprisingly resilient” despite the squeeze from higher interest rates, higher input costs and cost of living pressures. Following the release of the GDP data, he said that though economic stagnation is clearly bad in the long term, “if inflation can be brought under control without pushing the economy into outright recession then that will be no mean feat”. He described the figures as “not pretty, but not bad either”, and Bank of England rate-setters might well be thinking something similar.
Supportive of peak rates
The data is broadly in line with the BoE’s forecasts, and the Bank expects the economy to grow by 0.1 per cent in the final quarter of the year. As such, the data won’t provide policymakers with much justification for further interest rate hikes. James Sproule, chief UK economist at Handelsbanken, said that after the latest release, “any residual thoughts that the UK is not at the peak of its interest rate cycle are likely to continue to fade away”.
What it means for the timing of rate cuts is harder to say – not least because of mixed messages from the Bank itself this month. Chief economist Huw Pill implied that rate cuts towards the middle of next year sounded reasonable, only for governor Andrew Bailey to insist that it was “too early” to talk about lower interest rates. Sproule thinks that rates will need to stay on hold until summer thanks to more persistent UK inflation, and sees the BoE cutting rates later than the Fed and the ECB.
Some economists think the downwards move could come sooner. The ICAEW’s Economics Director, Suren Thiru, said that the downbeat data “suggests the Bank of England may have overdone the interest rate rises, and with that, the case for rate setters to pivot towards loosening policy is likely to strengthen.”
The political implications
Lindsey James, investment strategist at Quilter Investors, said that “with 2024 very likely to be an election year, the timing couldn’t be worse for the government to be heading into what feels like a recessionary period”. The government certainly finds itself in a tough spot: weaker growth would mean lower tax receipts, but any measures to boost the economy risk re-fuelling inflation and worsening the public finance position. As such, economists expect few big giveaways in the Autumn Statement later this month.
