Please see the below article from Evelyn Partners for their thoughts on the UK Q3 2023 GDP announcement:
What happened?
UK real gross domestic product (GDP) neither grew nor contracted in the third quarter with the headline quarter-on-quarter (QoQ) GDP growth rate estimated at 0.0% for Q3. This was better than had been expected by the median estimate among economists, of a 0.1% contraction. However, the growth picture was weaker than in the second quarter of 2023, when the economy expanded by a modest 0.2% QoQ.
What does it mean?
The UK economy managed to dodge a contraction in the third quarter, just edging out the 0.1% contraction that has been forecasted by economists, to instead show no growth for the quarter. This was driven by September’s monthly growth data which at 0.2%, was ahead of the expected flat growth forecast for the month. This means the UK economy is not yet teetering on the verge of a technical recession, which is defined as two consecutive quarters of negative GDP growth. On a year-on-year basis the UK economy has expanded by 0.6% over the last 12 months.
Despite a strong start to the first half of the year, consumption has now started to wane, with the sector contributing -0.2 percentage points to the QoQ real GDP figure. Within this, retail sales contracted by near 1% QoQ with consumer facing services contracting by a more pronounced 3%. Higher interest rates have likely weighed on discretionary spending over the summer, prompting a deterioration in consumer confidence. Further evidence of higher rates filtering through into the real economy could be seen from residential investment which fell 1.7% QoQ marking its fourth consecutive quarterly decline.
Government spending also weighed negatively on the quarterly growth rate, contributing -0.1 percentage points. Real government consumption expenditure fell by 0.5% in the third quarter following an increase of 2.5% in the previous quarter. The fall in government consumption in the latest quarter mainly reflects lower spending on health and on education, which fell by 1.4% and 0.3%, respectively.
A bright spot came from net trade, which contributed 0.4 percentage points to the QoQ rate. Export volumes increased by 0.5% in the third quarter, following a fall of 0.9% in the second quarter. The increase was driven by a 2.8% rise in services exports, which offset a fall of 2.0% in goods exports. Import volumes fell by 0.8% in the third quarter. This decline was driven by a 3.5% fall in goods imports, which offset a 4.2% increase in services imports.
Similarly, inventories remained a positive contributor to the headline figure, as it has now for four consecutive quarters, adding 0.2 percentage points to the QoQ growth figure.
Looking ahead:
The lagged impacts of tight monetary policy are beginning to impact the UK economy, as the cost of capital increase, households will experience a reduction in disposable incomes as aggregate mortgage payments tick up. However, as the labour market remains tight with unemployment at near recent lows and wage growth remaining elevated, this should act as a partial buffer for any downside potential on consumption heading into Q4 and into next year.
Although the BoE have seemingly paused on interest rates with markets pricing in only a ~20% chance of one more hike over the next three meetings, it does not mean rate cuts are on the immediate horizon. However, BoE chief economist Huw Pill recently hinted at rate cuts materialising sooner than participants expected. With the economic growth picture deteriorating and inflation starting to come under control it could prompt the BoE to cut rates as soon as Mid 2024.
Bottom Line
With the UK economy managing to avoid contraction in the third quarter the risks of an imminent technical recession have been delayed for now. However, as the impact of higher interest rates continue to put the brakes on consumption, the resulting drag on the real economy could lead to negative economic growth in the coming quarters which might prompt the BoE to cut rates sooner than expected.
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Andrew Lloyd DipPFS
10/11/2023