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UK Economy Faces Rocky Q4 as Recession Warnings Flash

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The UK economy is set to face a challenging end to 2023, as recent indicators have prompted the Bank of England (BoE) to halt its rapid monetary tightening, signaling a potential recession and rise in unemployment. The focus of the policy debate has shifted from fighting inflation to addressing the risks impacting the economy.

Last week, a survey of purchasing managers indicated a contraction in the economy and a potential increase in unemployment. S&P Global’s purchasing managers’ index slipped further into contraction territory in September, with the research firm warning of companies shedding employees at the fastest pace since the pandemic and the 2008 global financial crisis.

The BoE’s decision to call off another expected rate increase was influenced by this gloomy data. The central bank now predicts that gross domestic product (GDP) will only grow by 0.1% in the third quarter, a significant decrease from the 0.4% growth forecasted just seven weeks ago.

Economists, including Sandra Horsfield from Investec, have expressed concerns that the economy is entering troubled waters and expect a mild recession to follow this winter. However, there has been a recent decrease in inflation, as the Consumer Prices Index fell to 6.7% in August, lower than the BoE’s and economists’ expectations of over 7%. Governor Andrew Bailey anticipates a further significant drop in October’s figures, allowing for cautious optimism.

The BoE’s efforts to combat inflation through 14 consecutive rate rises seem to be yielding some results, as price pressures and the jobs market cool down. Retail sales data for August showed a 0.4% increase, offsetting some of the losses experienced in July due to unfavorable weather conditions. However, if September’s reading does not show a rise of at least 1.4%, retailers will contribute to a net drag on the third-quarter GDP.

Although there is a slight improvement in consumer confidence, with market research company GfK’s measure of sentiment reaching its highest level in almost two years in September, economist Alex Kerr from Capital Economics cautions that sentiment may be affected by the “growing drag from higher interest rates”. Household budgets are still being impacted by broader headwinds, despite wages rising faster than inflation.

Unfortunately, there is little expectation of fiscal support from Chancellor Rishi Sunak’s government to bolster the economy during this challenging period. This is despite the continued positive performance of public finances data.

Overall, the UK economy faces uncertainty and potential difficulties in the final quarter of 2023, with concerns about a recession and rising unemployment. While there are signs of decreasing inflation and a slight improvement in consumer confidence, challenges in the job market and household budgets persist. The government’s reluctance to provide fiscal support adds to the uncertainty surrounding the economy’s future.

More detail via The Star here… ( Image via The Star )

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