UK Economy Contracts, Raising Recession Concerns
UK's economy contracts in Q3, raising fears of recession as revised official data shows a shrinkage Stagnation looms ahead, highlighting the challenging times ahead for the United Kingdom
Revised official data shows that the United Kingdom's economy contracted in the third quarter of this year, raising fears that it may be on the verge of a mild recession. According to the Office for National Statistics, the country's gross domestic product decreased by 0.1% in the three-month period ending in September, contradicting the initial estimate of no change.
Revised GDP data for the previous quarter showed no growth, contrary to the previous estimate of a 0.2% expansion in the April-June period. The Office for National Statistics (ONS) reported a 0.2% decline in output in the dominant services sector in the third quarter, partially offsetting increases in construction and manufacturing. Additionally, consumer spending saw a 0.5% drop over the same period, slightly larger than the ONS's initial estimate of 0.4%.
Gas prices have come down in recent months
Aaron M. Sprecher/AP
Recession fears are starting to fade for Americans
Some analysts believe that the UK economy, struggling with higher inflation compared to other countries and burdened by increased borrowing costs, may be on the brink of a recession. A recession is typically characterized by two consecutive quarters of economic decline.
UK economist Ashley Webb at Capital Economics noted that the revised GDP figures could indicate the beginning of a mild recession in the third quarter. She also pointed out that the impact of higher interest rates on households is starting to become more significant. Webb predicted that with the full effects of higher interest rates yet to be felt, consumer spending is expected to decrease further in the fourth quarter of 2023 and the first quarter of 2024.
Consumer price inflation in the UK decreased to 3.9% in November, but remains well above the Bank of England's target of 2%. This is in contrast to the US and Eurozone, which have inflation rates of 3.1% and 2.4% respectively. Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, remarked that high-interest rates are still impacting household finances.
"The contraction in the economy increases the chances of an official recession coming down the pipes in the new year," she wrote in a Friday note.
Stagnation ahead
Despite avoiding a recession, the UK's growth outlook is bleak. The Office for Budget Responsibility (OBR) has projected the economy to grow by only 0.7% in the next year, a substantial decrease from their earlier forecast of 1.8% growth in March. This represents minimal improvement from the performance seen in 2023. The subdued outlook is attributed to weak real wage growth, the impact of previous interest rate hikes, and diminishing fiscal support, as stated in the OBR's November report.
The OBR suggests that only about half of the previous significant increase in interest rates has affected the economy so far because of the rise in fixed-rate mortgages. The delayed impact of interest rate hikes on household disposable incomes is expected to be felt as approximately 1.6 million fixed-rate mortgages are set to expire in 2024, according to UK Finance.
