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Worse than expected output data on Friday confirmed the UK’s struggle to escape its spell of economic stagnation, leaving third-quarter gross domestic product for 2023 barely above the levels at the end of last year.
But figures for the period leading up to Christmas suggest there are glimmers of light in some parts of the economy — most notably among households that are finally seeing less punishing rates of inflation.
The mixed numbers were released a day after chancellor Jeremy Hunt told the Financial Times that 2024 was “when we need to throw off our pessimism and declinism about the UK economy”.
How has the UK economy fared in 2023?
In a word, poorly. The country’s GDP contracted by 0.1 per cent in the third quarter, according to revised official figures published on Friday, after zero growth in the previous three-month period. Output grew by a tepid 0.3 per cent in the first three months of 2023.
On the spending side, the numbers were dragged lower by the UK’s cautious households, who cut their real expenditure by 0.5 per cent in the third quarter even as disposable incomes grew slightly. That pushed up the household saving ratio to 10.1 per cent. Business investment, meanwhile, fell by 3.2 per cent, slightly less than the previous estimate from the Office for National Statistics.
The falls were somewhat offset by higher government spending and trade flows. “Clearly, the UK economy has been struggling under the weight of higher costs and higher interest rates, and the decline in business investment, after a better couple of quarters, is particularly disappointing,” said Elizabeth Martins at HSBC.
Weak productivity growth suggests the country is unlikely to see robust and sustained growth rates any time soon. Productivity, which is ultimately what matters for rising living standards, has been almost flat since 2007, according to official figures published last month.
What about more recent data?
Output fell 0.3 per cent month on month in October, suggesting the UK is at risk of a technical recession if there is a contraction across the fourth quarter as a whole. However, some more recent figures tell a more encouraging story.
Retail sales jumped more than expected by 1.3 per cent between October and November, the fastest increase since January. While the Black Friday discounts boosted sales growth last month, the expansion was broad-based with higher sales volumes for food, households, online and fuel stores, suggesting some resilience in consumer spending.
“The fact that retail sales were strong across the board chimes with many surveys, which suggests that the economy continued to eke out some growth in the final quarter of the year,” said Thomas Pugh, economist at RSM UK.
In December, the S&P Purchasing Manager index, a measure of the health of private sector activity, grew more than expected to a six-month high, driven by a strong recovery in the services sector.
Is the fall in inflation helping?
Yes, this is a key factor for those who anticipate a better economic performance in the coming months. Inflation dropped more than anticipated to 3.9 per cent in November, the lowest level since September 2021.
With price growth easing, wages are now rising more than inflation. In the three months to October, real regular wages rose at an annual rate of 1.4 per cent, up from 1.3 per cent in the three months to September. Until June, real wages were falling.
If incomes continue to increase, households will eventually start to spend more, argue economists. Many expect incomes will continue to be supported by expanding real wages and Hunt’s cut in the national insurance rate, which takes effect in January.
There are some signs of that improved picture playing out in confidence numbers. Rising real wages helped consumer confidence to rise for the second consecutive month to a three-month high in December, according to data from the research company GfK.
“Consumer spending will be boosted by a quicker than expected fallback in inflation and the prospect of interest rates being cut sooner and more significantly than had been expected,” said Martin Beck, chief economic adviser to the consultancy EY ITEM Club.
What about interest rates?
The Bank of England is playing a critical role in this economic story. High borrowing costs, with the official rate at 5.25 per cent, are the main threat to hopes for a recovery of household spending.
But with inflation easing more than expected for two consecutive months, markets are pricing that the central bank will start cutting interest rates in the first half of next year, easing pressures on mortgage holders.
Investors now expect that the BoE will lower rates from the current 5.25 per cent to 3.75 per cent by the end of 2024.
The prospect of lower official rates has already started playing out in the housing market. Rates on popular mortgage deals have been coming off their 15-year peak since June, easing the squeeze on households who need to remortgage or sign new borrowing deals. Lower mortgage rates contributed to lifting mortgage approvals to a three-month high in October, according to data from the BoE published last month.
The ONS reported that house prices fell at the fastest annual pace in more than a decade in October, but the figures are based on transactions that might have been agreed several months before and are unlikely to reflect the latest improvement.
“With falling inflation and easier financial conditions, we are hoping for a happier economic new year,” said Martins.