Economic overview

Economic standstill

Despite managing to avoid a recession thus far, the UK economy is now mired in a period of stagnation. In the past four quarters, the Gross Domestic Product (GDP) has fluctuated within a narrow range, ranging from a marginal growth rate of 0.1 percent to a slight contraction of -0.1 percent. It is worth noting that the only quarter with negative growth was Q3 2022, which is less than what is required to classify as a technical recession.

Looking ahead, the outlook for economic growth is mixed. While some analysis suggests a contraction in 2023, the consensus is that the country may avoid a technical recession. The latest forecast from the Bank of England anticipates a flat performance for the UK economy during the first half of 2023 and an improvement in the latter half, with a projected growth of 0.25 percent for the entire year.

Sentiment indicators also paint a divergent picture. In May, the headline seasonally adjusted S&P Global UK Composite Output Index decreased to 53.9 from 54.9 registered in April, signalling a slowdown in economic activity. The latest survey results highlighted a notable surge in service sector output, which reached its highest level in a year. However, manufacturing production experienced a decline, reaching its lowest level since its peak in February. These contrasting trends in business performance largely reflect volatile patterns of demand.

Source: CIPS/S&P Global/Haver Analytics

In the 12-month period to April 2023, the Consumer Prices Index (CPI) recorded an 8.7 percent increase, lower than the 10.1 percent reported in March and below the peak of 11.1 percent recorded in October 2022. Although this decline is a step in the right direction, it fell short of market expectations of 8.4 percent. Despite the cooling in inflation, prices continue to rise.

Meanwhile, core inflation, which excludes food and energy costs, increased by 0.6 percentage points, from 6.2 percent in March to 6.8 percent in April, its highest level since March 1992. This is more than three times higher than the Bank of England's target of 2.0 percent.

Source: Office for National Statistics

The smaller-than-expected drop in headline inflation and increasing core inflation remain risky to the economy and offer incentives for the Bank of England to keep increasing the Bank Rate. In May, the Bank of England increased its base rate for the 12th consecutive time, raising it from 4.25 percent to 4.50 percent. Now a further 25 basis point increase in Bank Rate is almost certain, meaning it could reach 4.75 percent after the next Monetary Policy Committee (MPC) meeting.

The Bank has already warned that inflation levels are likely to remain high for an extended period, as the expected decrease in food prices is taking longer than anticipated, and the UK economy is suffering from a wage-price spiral. Ultimately, what is most concerning is the increase in services inflation, which rose from 6.6 percent in March to 6.9 percent in April.

The unemployment rate experienced a slight increase of 0.2 percentage points on the year, reaching 3.9 percent in Q1 2023. The rise in unemployment was primarily driven by individuals who had been unemployed for over 12 months. With the unemployment rate increasing, the long-term unemployed may find it more difficult to find a job in the near future.

On a more positive note, the economic inactivity rate decreased by 0.4 percentage points during the quarter, settling at 21.0 percent in Q1 2023. However, a concerning trend is emerging, as the number of individuals categorised as inactive due to long-term sickness has reached a record high. This indicates a notable increase in the proportion of individuals who are unable to participate in the labour market due to prolonged illness or health-related issues.

Source: Office for National Statistics