UK economy stagnates as high borrowing costs hit activity

UK economy stagnates as high borrowing costs hit activity

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The UK economy stagnated in the three months to September, according to official figures that highlight the challenge facing chancellor Jeremy Hunt as he seeks to boost growth in his upcoming Autumn Statement.

Gross domestic product was unchanged in the third quarter compared with the previous three months, data published by the Office for National Statistics showed on Friday.

Zero growth in the latest quarter was down from a 0.2 per cent expansion in the three months to June, suggesting that high borrowing costs are taking a toll on activity and the cost of living crunch is still hitting household spending.

The figure was slightly better than the 0.1 per cent contraction forecast by economists in a Reuters poll, but in line with the Bank of England’s expectations. The BoE has forecast that the economy will be flat in 2024.

Friday’s data eases concerns among many analysts that high interest rates are pushing the economy into recession. Some resilience in the economy in the face of high rates could also lead the central bank to keep them higher for longer, as it seeks to return inflation to the 2 per cent target.

“The key point is that the economy is not weak enough to reduce core inflation and wage growth quickly,” said Paul Dales, economist at the consultancy Capital Economics. He forecast that the BoE would only be able to cut interest rates in late 2024, rather than in mid-2024 as widely expected.

Output rose 0.2 per cent month on month in September, the ONS said, stronger than analysts’ expectations of no change.

That growth was driven by the health sector, which was helped by fewer strikes. It was also boosted by slower growth than previously estimated for August, revised down to 0.1 per cent from 0.2 per cent.

But the data showed overall that the economy — which is no bigger than in May last year — continued to flatline ahead of the Autumn Statement on November 22, in which Hunt will outline plans to boost economic growth.

Hunt said on Friday: “The Autumn Statement will focus on how we get the economy growing healthily again by unlocking investment, getting people back into work and reforming our public services so we can deliver the growth our country needs.”

James Smith, research director at the Resolution Foundation think-tank, said the data showed Britain was a “stagnation nation” that had struggled to secure sustained economic growth since the 2008-09 financial crisis.

The figures also leave the UK towards the bottom of the league table of major economies relative to pre-pandemic levels. Compared with the final quarter of 2019, the UK economy has grown 1.8 per cent, well below the 7.4 per cent expansion of the US and the eurozone’s 2.9 per cent growth. The UK has outperformed Germany, however, and posted similar growth to France.

Line chart of Real GDP, rebased Q4 2019=100 showing Since the pandemic, the UK economy has underperformed the US and the eurozone

In a worrying sign for Hunt’s plans to boost investment, the ONS data showed capital spending fell 2 per cent in the third quarter. This was driven by a 4.2 per cent contraction in business investment, considered a key factor in boosting productivity growth and living standards.

Real household expenditure also registered a 0.4 per cent contraction, driving a 0.7 per cent drop in consumer-facing services output. The trend is consistent with spending being cut amid high cost pressures.

Overall, the services sector registered a 0.1 per cent fall in the three months to September, driven by a contraction in real estate, which reflects the impact of high interest rates on the property market.

James Smith, economist at ING, a bank, said the economy had been “rescued by net imports, a category that tends to be pretty volatile between quarters”. There was also small growth in engineering and car sales and production.

Thomas Pugh, economist at consulting group RSM UK, said the “big picture” was “still one of a stagnating economy”.

“We doubt growth will materially pick up until towards the end of next year, meaning that the spectre of recession will hang over the UK economy for a long time yet.”

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