Finance & Economics

UK’s Economy Shrinks

The economy of the United Kingdom in October this year showed a contraction that turned out to be stronger than expected.

UK’s Economy Shrinks

In this case, the increased cost of borrowing has become a factor of particular importance. The current situation in the United Kingdom’s economic system creates the prerequisites for another quarter of stagnation, which is expected to continue next year.

In October, the gross domestic product in the UK showed a drop of 0.3% year-on-year. The relevant data were released by the Office for National Statistics (ONS) on Wednesday, December 13. In October, the United Kingdom’s GDP grew by 0.2% year-on-year. In this case, there is a clear deterioration of the dynamic. The October drop in GDP was the first since July. Economists predicted a deterioration in the dynamic of this indicator but expected the decline to be minimal and amount to 0.1%.

Also, the forecasts did not coincide with the economic reality that was recorded in October in industrial production, the real estate sector, and sphere services. In this case, the state of affairs can be described as a weakness that turned out to be more significant than the assumptions about it.

Traders have increased their bets on an interest rate cut by the Bank of England. In their opinion, the British financial regulator will reduce the mentioned indicator by 95 basis points next year. The pound fell 0.3% to $1.2525 amid news of a contraction in the economy.

Before October, the situation in the British economic system was more positive and contained certain signs that the future would probably not only be sunny but also would not become a period of dark times. However, the situation has worsened. Against the background of the October economic indicators of the United Kingdom, opinions have intensified that the country is currently in a state of protracted inflation.

At the same time, experts’ forecasts for the near future are not unambiguously pessimistic, although the long-term outlook, in their opinion, does not give reason for optimism. The full impact of the increase in interest rates by the Bank of England has not yet been realized, which is why the United Kingdom economy may show a small increase in the fourth quarter of this year. As for the long-term forecast, in this case, some experts admit the possibility of a recession, specifying that it will appear itself on a moderate scale.

Douglas Grant, CEO of Manx Financial Group, says that the UK GDP data for 2023 is a picture of sluggishness, bleakness, and lackluster economic performance.

The media notes that in this case, the government of the Prime Minister of the United Kingdom, Rishi Sunak, faced a gloomy economic background for the general elections, which are expected to be held next year.

Experts Ana Andrade and Dan Hanson are convinced that the October GDP figure will affect the result for the entire fourth quarter. In this context, they also note the negative impact of high-interest rates on the intensity of business activity. Experts predict a mild recession in the British economy. Also, in their opinion, current trends may give the Bank of England a reason to start lowering interest rates until the level of overall inflation reaches 2%. The experts’ baseline scenario assumes that the financial regulator will make an appropriate decision next summer.

Rishi Sunak promised to ensure economic growth. Whether this goal will be achieved depends on the dynamic GDP in the fourth quarter of this year. The Prime Minister has already faced criticism from the Conservative Party, which is not strange to him, and opposition-minded Labour members, against the background of the gloomy prospects of the United Kingdom.

Paul Nowak, general secretary of the Congress of Trade Unions, said that the current performance of the British economic system signals that the country is dangerously close to recession. In his opinion, the Tories have no plan to get out of this situation.

Chancellor of the Exchequer Jeremy Hunt suggested that the current configuration of the economic system, whose condition is characterized as weak, is necessary to contain the inflationary process, which is also one of the main goals of the government. He said that GDP will inevitably show a decline when interest rates will do the job of lowering the inflation rate. Separately, Jeremy Hunt noted that the significant reduction in business taxation announced in the autumn means that the economy currently has every opportunity to resume growth.

The ONS also states that adverse weather conditions in the United Kingdom have had an impact on the implementation of projects in the sphere of construction, retail, pub activity, and tourism. The Meteorological Office called October 2023 the sixth-rainiest October in the history of observations in the UK since 1836.

The volume of consumer-oriented services in the United Kingdom showed a decline of 0.1% year-on-year in October. The current figure is 5% lower than the level that was observed before the coronavirus pandemic.

Paul Dales, the chief economist at Capital Economics in the UK, said that the widespread nature of the weakness of the British economic system in its current state suggests that in this case, something more than just rainy weather is a deterrent to positive dynamic. He predicts that this situation will continue next year.

The sphere of human health grew 0.5% in October year-on-year. In the mentioned month, doctors conducted three days of coordinated strikes. For this reason, 118,026 appointments are being rescheduled. In September, 129,913 appointments were postponed as a result of four days of strikes.

The manufacturing industry in October showed a decline of 1.1% year-on-year.

The Bank of England does not expect economic growth next year. At the same time, the Office for Budget Responsibility, having a more optimistic attitude, predicts an increase in the corresponding indicator by 0.7% in 2024. Some experts believe that the British economy is already in recession, which will last until the middle of next year.

The Bank of England is expected to keep its base rate at 5.25%, which is a 15-year high, this week.

Roger Barker, director of policy at the Institute of Directors, says that the current situation indicates a falling economy. He does not believe that there is currently a recession but argues that the risks of this state of affairs next year have increased.

In the third quarter, the United Kingdom’s economic system managed to avoid contraction due to high trade figures. In October, domestic demand showed a decline.

The impact of high-interest rates is expected to increase next year. In 2024, about 1.4 million British households intend to refinance their mortgages.

Yael Selfin, chief economist at KPMG UK, suggests that Britain is likely to be able to avoid a widespread slowdown, but households will face difficulties.

Thomas Pugh, an economist at audit, tax, and consulting firm RSM UK, expects that the fourth quarter will not be the beginning of a recession, but a repeat of the previous quarter. In his opinion, according to the results of the last three months of this year, an increase in consumer spending will be recorded in the United Kingdom. Expert justifies this forecast by reducing the rate of inflation, increasing wages, and government transfers to low-income households.

In October, the UK’s trade deficit widened to 17.3 billion pounds ($21.7 billion). The growth of imports exceeded the analogical indicator of exports. Shipments to the UK increased mainly due to imports of machinery and transport equipment. British exports have grown due to demand outside the EU.

Mark Mills-Goodlet, managing director of second-hand car dealership Winchester Motor Group, says that business, against the background of current economic realities, does not have an understanding of whether it is worth investing nowadays or whether it is better to postpone the relevant decision to a later date.

As we have reported earlier, UK’s Nottingham Files for Bankruptcy.

Serhii Mikhailov

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Serhii’s track record of study and work spans six years at the Faculty of Philology and eight years in the media, during which he has developed a deep understanding of various aspects of the industry and honed his writing skills; his areas of expertise include fintech, payments, cryptocurrency, and financial services, and he is constantly keeping a close eye on the latest developments and innovations in these fields, as he believes that they will have a significant impact on the future direction of the economy as a whole.