Michelle ThompsonRevised official data reveals that the United Kingdom’s economy contracted in the third quarter of this year, raising concerns that it might be on the brink of a mild recession. The Office for National Statistics reported that the country’s gross domestic product (GDP) declined by 0.1% in the three months ending in September. This marks a change from the initial estimate, which indicated no change in GDP. Additionally, data for the preceding quarter was revised downward, showing no growth, contrary to the earlier estimate of a 0.2% expansion in the April-June period.
According to the Office for National Statistics (ONS), the leading services sector experienced a 0.2% decline in output during the third quarter, which offset the gains observed in construction and manufacturing. Additionally, consumer spending decreased by 0.5% during the same period, representing a slightly larger drop than the initial ONS estimate of 0.4%.
Some analysts are expressing concerns that the UK economy, which is grappling with relatively high inflation and elevated borrowing costs, could be on the verge of a recession. A recession is typically defined as two consecutive quarters of economic contraction.
Ashley Webb, a UK economist at Capital Economics, suggests that the revised GDP figures may indicate the onset of a very mild recession in the third quarter, and they indicate that the impact of higher interest rates is starting to have a greater impact on households. Webb predicts that consumer spending will likely decline further in the fourth quarter of 2023 and the first quarter of 2024 as the full effects of higher interest rates take hold.
In November, UK consumer price inflation eased to 3.9%, although it remains well above the Bank of England’s target of 2%, and it compares unfavorably with inflation rates of 3.1% in the United States and 2.4% in the Eurozone. High interest rates are continuing to erode household finances, according to Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown.
Lund-Yates also notes that the economic contraction increases the likelihood of an official recession occurring in the new year.
Anticipating a period of economic stagnation.
Even if the UK manages to avoid a recession, its outlook for growth appears bleak. The Office for Budget Responsibility (OBR) anticipates that the economy will expand by a mere 0.7% in the coming year. This projection represents a significant decrease from the OBR’s earlier forecast in March, which predicted a 1.8% growth rate. Furthermore, it indicates only marginal improvement compared to the performance in 2023.
The less optimistic economic outlook is attributed to factors such as weak real wage growth, the consequences of previous interest rate hikes, and diminishing fiscal support, as stated in the November report by the OBR.
The OBR also pointed out that it is plausible that only about half of the significant increase in interest rates from the past has yet affected the economy. This delay in the impact of interest rate hikes is partly due to the growing prevalence of fixed-rate mortgages in recent years, which has postponed the effects on many households’ disposable incomes.
According to UK Finance, an association representing banks and financial services firms, approximately 1.6 million fixed-rate mortgages are set to mature in 2024.
