Economic overview
The UK economy continues to make slow progress
Following the 0.2 percent rise in Gross Domestic Product (GDP) in Q2 2023 the economy stagnated in Q3 showing no growth on the quarter. That said the performance was better than the consensus forecast of a 0.1 percent fall.
In Q3, services output declined by 0.1 percent compared to the preceding quarter, production output flattened, and construction output saw a modest 0.1 percent rise. However, high inflation and interest rates continue to weaken business investment and household spending, both contracted in Q3. While concerns about a deep recession have largely diminished, ongoing uncertainty and persistently low productivity pose downside risks for growth. Escalation in geopolitical tensions in the Middle East could potentially fuel another rise in inflation.
The consensus of forecasts published by the HM Treasury shows GDP growth slowing from 4.4 percent in 2022 to just 0.5 percent in 2023 and 0.4 percent in 2024 and stronger growth of 1.4 percent in 2025. After some encouraging data earlier this year, retail sales have now declined in three of the last four months. While higher interest rates are reducing the headline rate of growth of consumer inflation, labour shortages are putting upward pressure on wage growth. That said some of the increase in wage growth was due to one-off payments for public sector workers made in June and July 2023.
Source: Office for National Statistics
In October, the annual consumer price inflation rate slowed sharply to 4.6 percent from 6.7 percent in February - lower than the consensus forecast of 4.8 percent. The largest driver of this fall was the housing component reflecting last October’s sharp rise in domestic electricity and gas prices dropping out of the annual comparison by a fall this October with the latest energy price cap reduction. Despite some upward pressure from escalating fuel prices, goods price inflation more than halved from 6.2 percent in September to 2.9 percent in October. However, services inflation, a good indicator of underlying domestic inflation, only fell from 6.9 percent in September to 6.6 percent in October.
Although the unemployment rate rose to 4.3 percent in the three months to August, up from 3.8 percent in the prior three-month period, the decline in those employed was a modest 207,000 in the same period. While some commentators see further evidence of the labour market cooling, this is not borne out by the wage data.
Annual pay growth is still at an elevated 7.7 percent in the three months to September, significantly surpassing the 2.0 percent target for consumer price inflation. This supports the narrative that interest rates may remain higher for longer although at a lower rate than initially expected.
While the Bank Rate was unchanged in November 2023 at 5.25 percent for the second month running it is now widely expected to have peaked. Following weak GDP data and the sharp fall in inflation financial markets now expect a rate cut next May (it was August previously). However, before any rate cut the Bank of England (BoE) will want to see a sharp slowdown in services inflation and CPI getting closer to the 2 percent target earlier than it expects (Q4 2025). The consensus forecast is for inflation to end in 2024 at 3 percent and 1.9 percent in 2025.
Source: Office for National Statistics, Bank of England and HM Treasury (November 2023)
Economic data
GDP at (market price) index
Q3 2023: 102.2 Q2 2023: 102.2 No change: 0.0%
Unemployment level (thousand)
Q2 2023: 1,439 Q1 2023: 1,329 Increase: 8.3%
Construction output index
Q3 2023: 105.6 Q2 2023: 105.5 Increase: 0.1%
Consumer price inflation
October 2023: 132.0 October 2022: 126.2 Increase: 4.6%
Bank of England base rate
November 2023:5.25 October 2023: 5.3 No change: 0 Basis points
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