UK economic growth was unchanged in the fourth quarter, and only slow expansion is expected in the years ahead.
In October, the UK economy contracted more rapidly than initially anticipated, primarily due to more severe-than-expected declines in the manufacturing and construction sectors.
While economists caution against prematurely predicting a recession, they highlight the lingering concern that the “specter” of recession will persist in Britain. As the Bank of England readies to maintain interest rates at 5.25% on Thursday, the objective is to address persistent high inflation without pushing Britain into a recession.
In October, Gross Domestic Product (GDP) declined by 0.3%, contrasting with the 0.2% growth in September, according to the Office for National Statistics (ONS).
The anticipated contraction was 0.1%. Labour’s shadow chancellor, Rachel Reeves, asserts that the data underscores the failure of Rishi Sunak’s government to fulfill its economic growth promises.
“Rishi Sunak ends the year having failed to deliver on his own promise to grow the economy. Economic growth is going backwards,” Ms Reeves said – accusing Mr Sunak of being “too weak to deliver for Britain”.
Chancellor Jeremy Hunt defended his policies and claimed it was “inevitable” that growth will be “subdued whilst interest rates are doing their job to bring down inflation”.
Pointing to his tax cuts, Mr Hunt added: “But the big reductions in business taxation announced in the autumn statement mean the economy is now well placed to start growing again.”
Service, industrial production, and construction have all simultaneously experienced their first decline in 5 months, and this is the primary factor contributing to the GDP reduction due to their significant role in the economy.
To be specific, manufacturing and construction witnessed declines of 1.1% and 0.5%, respectively, in October, while the pivotal services sector across the nation contracted by 0.2%.
Services catering to consumer needs saw a 0.1% decrease, resulting in the output within this sector falling more than 5% compared to pre-pandemic levels. The most substantial positive contribution came from other personal service activities, which decreased by 2.3%.
This data was disclosed just ahead of the Bank of England’s final interest rate decision for 2023. On December 14, the Bank of England is anticipated to maintain the interest rate at its highest level in 15 years, which is 5.25%.
The British Pound depreciated by approximately 0.3% against the USD, reaching 1.25 USD on December 13 following the country’s GDP announcement.
Traders are increasingly anticipating that the Bank of England will need to implement deeper interest rate cuts in 2024.
Over recent years, households and businesses in the UK have been grappling with mounting pressures due to the escalating cost of living, while the looming risk of economic recession persists.
Thomas Pugh, at consulting firm RSM UK, said that a drop-off in inflation and rising wages would likely boost the economy in the last two months of the year. But he said the big picture was “still one of a stagnating economy”.
The expert added: “We doubt growth will materially pick up until towards the end of next year, meaning that the specter of recession will hang over the UK economy for a long time yet.”
Federation of Small Business chair Martin McTague said that the figure was “disappointing news” that “will leave many feeling flat”.
The disappointing reading coincides with the upcoming adjustment of the interest rate by the Bank of England on Thursday.
Policymakers were already leaning towards not raising interest rates during this week’s meeting.
The information from the ONS will provide policymakers with increased confidence that interest rates are sufficiently high to be “restrictive” and have a dampening effect on the economy. They are cognizant that the full impact of their recent series of interest rate hikes has not been fully realized yet.
Individuals who have secured new mortgages, engaged in property remortgaging, or are on a tracker mortgage have experienced a substantial increase in their monthly payments.
Approximately five million mortgages are still set for renewal by the end of 2026. Until now, these individuals have managed to avoid the impact of rising interest rates..
But the rate-setters on the Monetary Policy Committee (MPC), including Bank governor Andrew Bailey, have stressed repeatedly that it is far too soon to talk about cutting rates.
“October’s drop in GDP adds to the growing list of recent downside data surprises, but we still doubt that the MPC will change its tune and signal its willingness to cut Bank rate next year as soon as this week’s meeting,” said Samuel Tombs of Pantheon Macroeconomics.
Although the predominant services sector played a significant role in the October deceleration, the production sector experienced the most pronounced decline. Output in this sector decreased by 0.8 percent, primarily attributed to a manufacturing slowdown, notably in the computer, electronics, and optical products segments. Additionally, the construction sector was adversely affected by one of the rainiest Octobers in the past 200 years.
Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, said the latest GDP figures “put the prime minister’s target to get the economy growing by the end of the year in jeopardy”.
No 10 claimed the UK economy had “overperformed”, pointing to long-term figures over the past decade – but did not rule out the possibility of a recession in the year ahead.
Mr Sunak’s spokesman said: “We’d never speculate on future predictions. We have outperformed in recent months and years – we have grown faster than France, Germany, Italy and Japan since 2010.”
Asked if Mr Sunak believed in his promise to grow the economy and the other of his five pledges, the No 10 official said: “The prime minister remains committed to the five pledges.”
Some Tories have urged Mr Sunak to find a better system of economic forecasting in an effort to cut taxes further. Conservative MP Greg Smith asked at PMQs: “Will he commit to finding a better system of financial modeling so we can get taxes lower?”
Mr Sunak defended the Office for Budget Responsibility (OBR), saying it had brought “greater transparency and independence to the forecasting on which government policy is based”.
Source: Independent
By. Pham Thanh Bien
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