The UK economy exhibited no growth in the third quarter, according to recent figures, following a series of interest rate hikes. The Chancellor acknowledged that higher rates were impacting growth, but he also highlighted that the economy had outperformed expectations this year. Analysts predict continued stagnation for several months, with the Bank of England’s recent forecast indicating zero growth until 2025. Despite the central bank’s 14 consecutive interest rate increases aimed at curbing inflation, the measures are simultaneously affecting economic growth by raising borrowing costs for consumers and businesses.
The current interest rate stands at a 15-year high of 5.25%, and indications suggest it will remain elevated for an extended period. Bank Governor Andrew Bailey emphasised that it is premature to consider rate cuts. Economists note a growing impact from higher interest rates, but predictions suggest the Bank will likely delay rate cuts until late next year.
The Office for National Statistics (ONS) reported subdued growth across all economic sectors. The services sector experienced a slight decline, while manufacturing and the construction sector recorded marginal growth. Despite the drag from interest rate increases, the risk of a formal technical recession, defined as two consecutive quarters of economic contraction, has diminished.
Chancellor Jeremy Hunt attributed the slowed growth to interest rates but emphasised that the economy had performed better than anticipated. He expressed surprise at the economy’s strength, which had defied expectations of contraction. Looking ahead, forecasts for the final quarter of the year project growth between 0% and 0.1%, aligning with other major European economies facing challenges from rising interest rates.
While the Bank of England may view the situation as a managed descent from last year’s inflationary pressures, the government faces a delicate balance. Prime Minister Rishi Sunak’s commitment to “grow the economy” is on shaky ground, as even the July-September period witnessed a marginal contraction, albeit rounding down to 0.0%.
As the government looks towards the Autumn Statement on November 22, questions about achieving growth targets persist. Opposition voices, such as Labour’s Rachel Reeves, argue that the latest figures underscore systemic issues in the economy. The inflation problem is gradually easing, with a significant fall in the headline rate forecast for October, potentially allowing the government to claim success on that front while grappling with ongoing growth challenges. Consumer confidence remains a concern, with businesses reporting decreased spending and cautious purchasing behaviour.
In the midst of economic uncertainties, the Chancellor hinted at a potential tax reduction in the Autumn Statement, prioritising business tax cuts over personal taxes to stimulate growth. As the UK navigates the delicate balance between addressing inflation and fostering economic growth, the challenges ahead could redefine the political and economic landscape.