The UK economy is facing a challenging final quarter of 2023, as indicated by multiple factors that have forced the Bank of England (BOE) to halt its rapid monetary tightening. Concerns of a recession are growing, with a survey of purchasing managers pointing towards a contraction and a potential increase in unemployment. This shift in the policy debate away from combating inflation and towards addressing the risks affecting the economy is complicating Prime Minister Rishi Sunak’s task of rallying Conservative Party members at their upcoming annual conference in Manchester.
One of the key indicators of a potential downturn came from the purchasing managers’ index (PMI) released by S&P Global on Friday. The index slipped further into contraction territory in September, with the research firm also warning that companies were shedding staff at the fastest pace since the pandemic and the global financial crisis over a decade ago. The BOE’s rate-setters were given early access to this gloomy data, leading to their decision to cancel another expected rate increase. The central bank now predicts that gross domestic product (GDP) will only rise by 0.1% in the third quarter, down from the previous forecast of 0.4% growth just seven weeks ago.
On the positive side, inflation is falling more sharply than anticipated by the BOE. Data released on Wednesday showed that the Consumer Prices Index eased to 6.7% in August, significantly below the expected 7% or more. BOE Governor Andrew Bailey has warned against complacency, leaving the possibility of resuming rate hikes open. However, there is a sense that the worst period of price increases in the Group of Seven nations is behind the UK, suggesting that the BOE’s consecutive rate rises may be starting to have a positive impact.
Retail sales data released on Friday showed a 0.4% gain in August, partially recovering from the decline in July caused by bad weather. However, unless September’s reading shows an increase of 1.4% or more, retailers are expected to contribute negatively to third-quarter GDP. Economist Alex Kerr from Capital Economics cautioned that August’s growth was not as significant as it appears and predicted a decline in consumer spending in the coming quarters. Although wages are rising faster than inflation, which eases the cost-of-living squeeze, broader challenges may still affect household budgets.
While consumer confidence is currently improving, with GfK’s measure of sentiment reaching its highest level in almost two years in September, economist Alex Kerr warned that this could be impacted by the growing drag of higher interest rates. Furthermore, there is little expectation of fiscal support from the government, despite the continued strong performance of public finances data. Chancellor of the Exchequer Jeremy Hunt dampened hopes of tax cuts, stating that they are virtually impossible given the challenging economic and fiscal backdrop.
The property market in Britain is also experiencing a slowdown, with average house prices slightly declining from their peak in November, according to official data released on Wednesday. Mortgage lenders’ data suggests that the country is about halfway through an anticipated 10% slump. This decline could add to the economic headwinds, reducing the sense of wealth for homeowners and forcing aspiring property buyers to save more.
Overall, the UK economy is facing significant challenges in the final quarter of 2023. The indicators point towards a potential downturn, with several factors such as declining retail sales, a deflating property market, and the threat of rising unemployment complicating the situation. While there are positive signs such as falling inflation, caution remains necessary, and the government is unlikely to provide fiscal support. The upcoming Conservative Party conference will be a crucial platform for Prime Minister Rishi Sunak to address these concerns and rally support for his government’s economic policies.
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