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Deeper into the numbers: the housing market is dragging back as interest rates rise.
After proving unexpectedly resilient this year despite rising costs of living, the UK economy has weakened significantly. The services sector shrank last quarter as the highest interest rates since 2008 weighed on housing construction.
The manufacturing sector also declined, while repairs helped offset the decline in new work in the construction sector.
According to the statistics agency’s monthly breakdown of GDP, the economy grew 0.2 percent in September, slightly more than in August, after a 0.6 percent decline in July.
International comparisons: a stagnant Europe and a strong United States.
Britain’s weak economy reflects stagnation in continental Europe, where eurozone economies shrank 0.1 percent in the third quarter. Germany, the bloc’s largest economy, has narrowly avoided a recession as businesses have been hit by high energy prices and weak demand for industrial goods. Across the region, high interest rates aimed at reducing inflation are weakening economic activity, reducing demand for loans and slowing consumer spending.
This contrasts with the United States, where the economy is growing strongly and defying expectations of a slowdown due to high interest rates. Instead, slowing inflation and a resilient labor market have boosted consumer confidence to spend.
The prospects: no growth, but no recession.
According to the Bank of England, the British economy is not expected to sink into recession, but it will only be able to avoid this distinction by a hair. The central bank forecasts that GDP will rise by just 0.1 percent in the last three months of the year before leveling off in 2024 and early 2025.
This weak outlook is driven by high interest rates, which are expected to take an increasingly heavy toll on the economy. So far, less than half of the full effect of higher interest rates has been felt, the central bank estimates, and policymakers expect the constraint effects to shift from the housing market to business investment and consumer spending.
Quotable: “Puffing very slowly.”
Economists at the National Institute of Economic and Social Research, an independent research body, said this week that they expected “slow” economic growth this year and next, but slightly stronger activity than the Bank of England had forecast.
“The bottom line here is that Britain is almost leveling off and moving very slowly,” says Stephen Millard, deputy director of the institute, “and the precise numbers are almost irrelevant.” About five million people in lower income groups will not see their living standards return to pre-pandemic levels until 2026, the institute predicts.
What now? The government is making efforts to strengthen the economy.
Jeremy Hunt, the Chancellor of the Exchequer, will announce updates to the country’s budget later this month, which he said would focus on “how we get the economy back to healthy growth” through private investment and encouraging more people back to work.
But Mr Hunt is not expected to make substantive changes to taxes or spending because of the constraints imposed by another of his priorities: reducing the national debt as a share of GDP.
Even though it appears the country’s public finances are in better shape than expected, most analysts expect Hunt will wait until closer to the next elections, due in January 2025, to provide fiscal sweeteners. But economists at the National Institute of Economic and Social Research have urged the government to significantly and urgently increase public investment, especially in infrastructure and housing.
