UK hunts for elusive growth after lost year for the economy

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Rishi Sunak was fast to declare victory in November when he met his aim of presiding over a halving of inflation. However the prime minister had much less room for rejoicing over one of many different pledges he set out firstly of the yr: his vow to develop the economic system.

The story of 2023 has as an alternative been considered one of near-stagnation — a misplaced yr which was confirmed final week because the Workplace for Nationwide Statistics reported a 0.3 per cent drop in gross home product between September and October.

That left output no increased than in January. Exercise is forecast to stay tepid subsequent yr with excessive borrowing prices and the legacy of the worst inflationary upsurge in a technology weighing on the economic system.

“The nation’s financial prospects stay fairly bleak, frankly — we’re treading water,” stated Jagjit Chadha, director of the Nationwide Institute of Financial and Social Analysis. “Given the UK’s low productiveness, I believe development can be imperceptible for the remainder of the last decade.”

The retreat in headline inflation to 4.6 per cent is now easing a few of the strain on family funds, however the economic system has but to indicate a lot vigour. Output in lots of industries, together with IT, monetary providers, transportation, retail and actual property was decrease in October than firstly of the yr.

Development, manufacturing and hospitality managed to supply extra in October than firstly of the yr, however their efficiency has nonetheless trended downward within the newest months. Well being and training had been the sectors that compensated for the autumn in the remainder of the economic system since January.

What’s extra, the amount of complete UK exports was down 6.8 per cent within the three months to September in contrast with the final quarter of 2022, pushed by a pointy contraction in items exports.

“The UK economic system has been battling towards a cocktail of headwinds from the price of dwelling disaster, rising rates of interest, risky vitality costs, Brexit, the fallout from Covid, a low productiveness drawback and a long-term scarcity of funding,” stated Victoria Scholar, on the funding platform Interactive Investor.

Households had been nonetheless dealing with double-digit charges of meals value development at 10.1 per cent as of October. Adjusted for inflation, wages are only one.3 per cent above January’s ranges and nonetheless under their ranges for many of 2022. In October, customers had been shopping for lower than final yr even when they had been spending extra money, notably on meals.

In the meantime, tenants are scuffling with the quickest rental development since information started in 2016, whereas the typical mortgage fee is on the highest since 2009. Extra households face increased borrowing prices as their fixed-term offers expire. Mortgage arrears have already began rising and enterprise insolvencies are on the highest degree since 2009.

The monetary pressures have taken a toll on households’ morale and spending. Reported life satisfaction, happiness and feeling that life is worth it have all declined this yr, and they’re properly under their pre-pandemic ranges, in response to the Workplace for Nationwide Statistics.

The UK is not at all the one nation performing weakly. The German economic system was no larger within the three months to September than within the final quarter of 2022, with comparable outcomes for Italy, France and the eurozone. Nonetheless, the UK compares poorly with the US the place output grew 2.4 per cent over the identical interval.

The misplaced yr for development is prone to prolong into 2024, in response to the Financial institution of England which in November foresaw no growth in any respect subsequent yr. Economists polled by Consensus Economics have revised down their UK development expectations for subsequent yr to 0.3 per cent, down from a 0.8 per cent forecast in Could.

That stated, the slowdown in inflation suggests causes to anticipate that the price of dwelling disaster will ease. Some points which have saved the UK economic system in stagnation “are actually clearly dissipating,” stated Tomasz Wieladek, chief European economist at funding firm T Rowe Worth.

Crucially, households’ inflation expectations have fallen. “This implies . . . value of dwelling concerns are actually much less of a drag in client confidence and personal consumption,” he defined.

UK value development slowed to 4.6 per cent in October from its October 2022 peak of 11.1 per cent. It’s anticipated to have declined additional to 4.4 per cent in November when the information is printed on Wednesday.

This implies the BoE doesn’t must generate a deep recession to convey inflation again to its 2 per cent goal. “A yr in the past, that appeared like a definite risk,” stated Paul Dales, economist at Capital Economics. 

Easing inflation means wages have began to rise quicker than value development since June, boosting spending energy. It additionally signifies that. with fee cuts anticipated for subsequent yr, some fashionable mortgage charges are coming down from their summer season peak. After hovering at traditionally low ranges for many of 2023, client confidence has lastly began to enhance — and so has business morale.

Enterprise funding rebounded in 2023 and was up 3.7 per cent within the three months to September in contrast with the final quarter of 2022, helped by a beneficiant tax break that turned everlasting within the Autumn Assertion. That adopted an extended interval of stagnation, nonetheless, which means enterprise funding continues to be solely about 4.9 per cent above what it was in Q2 2016, when the UK voted to depart the EU.

Whereas 2023 has been tepid at greatest, some forecasters had anticipated it to be significantly worse. Financial institution of England predictions in 2022 that the nation was dealing with a “extended” recession weren’t borne out — pointing to welcome indicators of resilience.

“It’s a miracle the economic system didn’t contract given the double whammy [it] confronted this yr from the price of dwelling disaster related to excessive inflation and the quickest and largest rise in rates of interest because the late Nineteen Eighties,” stated Dales.

Towards that backdrop, he argued, a stagnant economic system could be described as a “score-draw fairly than a loss”.