Economic outlook

Economy grinds to a halt in Q3

After strong growth in the first two quarters, the economy nearly stalled in Q3, with gross domestic product (GDP) increasing by just 0.1 percent, falling short of the 0.2 percent consensus forecast. This slowdown was not entirely unexpected given the pre-budget uncertainty.

Compared to a year earlier the economy has expanded by 1.0 percent. The growth in the latest quarter was driven mainly by a 0.8 percent increase in construction output, and a 0.1 percent increase in the services sector, while production fell by 0.2 percent on the quarter.

While the Office for Budget Responsibility (OBR) is forecasting 2.0 percent growth in 2025 following the Autumn Budget, the consensus amongst economists is significantly lower at 1.3 percent.

The first Standard & Poor (S&P) Global UK Composite Purchasing Managers’ Index (PMI) survey following the Budget dropped from 51.8 in October to 49.9 in November, dropping below the 50.0 no change level for the first time since October of last year. A reading above 50 points suggests expansion and 50 below indicates possible contraction. The latest reading is indicative of the UK economy contracting at a quarterly rate of 0.1 percent, based on an analysis of the historical relationship of the PMI with GDP.

Source: Office for National Statistics

Inflation back above target

The annual rate of consumer price inflation (CPI) increased from 1.7 percent in September to 2.3 percent in October, slightly above the consensus forecast. A key factor was the rise in the energy price cap.

Core CPI, which excludes energy and food, rose to 3.3 percent from 3.2 percent, contrary to the expected drop to 3.1 percent. The 5.0 percent increase in services CPI aligned with the Bank of England’s (BoE) expectations, serving as a good indicator of domestically driven inflation.

Economists expect inflation to remain just above the 2.0 percent target over the next five years.

Second Bank Rate cut

The BoE cut the Bank Rate for the second time since August to 4.75 percent from 5.0 percent at its November meeting.

Hopes for another rate cut in December are unlikely, as the BoE has consistently indicated that policy loosening will be gradual. Compared to its August report, market analysts are now predicting a slightly faster pace of rate cuts in 2025 and 2026, though not as low as they previously expected for 2027.

Three rate cuts are anticipated in the first half of 2025, followed by a pause. Following the Budget the BoE is unlikely to further stimulate the economy to avoid fuelling inflation.

Source: Bank of England

Labour market data provides a mixed picture for the BoE

Since peaking at 7.9 percent in August 2023, private sector annual regular growth fell to 4.8 percent in September. The ONS also reported an increase in the unemployment rate from 4.0 percent to 4.3 percent over the same period.

However, due to known sampling issues and significant base effects, the ONS has found it challenging to provide precise figures. Therefore, this data should be interpreted with caution.

Budget 2024

The long-awaited Budget introduced the largest tax increase in history, but changes in fiscal rules will allow £100bn to be invested in capital projects over the next five years. For full details Autumn Budget 2024