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Despite the UK’s economic performance being slightly better than economists had expected in Q3, Cazenove Capital’s senior European economist and strategist Azad Zangana expects to see a contraction in Q4. He explains why we might be on track for a potentially shallow technical recession in early 2024
ECONOMIC activity in the UK was flat in the third quarter according to preliminary estimates from the Office for National Statistics.
Quarterly real GDP growth slowed from 0.2% in the second quarter, although the latest reading was slightly better than consensus expectations of a 0.1% decline. On a quarterly year-on-year basis, GDP growth was unchanged at 0.6% from the previous quarter.
Examining the details of the data reveals a weaker outlook, likely to be impacted by the aggressive rise in interest rates over the past year. Total household spending fell by 0.4% over the quarter adjusted for inflation, with most of the cutbacks happening with goods (-0.8%) rather than services. Although the same quarter a year earlier was even weaker (-0.9%), this was impacted by an additional public holiday, which would have distorted the data negatively.
Total investment in the economy fell by 2% in the third quarter, dragged down by private business investment (-4.2%) but partly offset by government investment (4.3%). Business investment was up 8.3% in the previous quarter compared to the end of last year, and so the latest pullback was not a total surprise. However, private business surveys suggest widespread pessimism over the economic outlook and plans to cut back on spending and investment. We expect to see further declines in private capital expenditure in the coming quarters while business confidence remains low.
There was a small (0.4 percentage point) positive contribution from net trade – the first in a year. However, this was largely due to a decline in imports (-0.8%) rather than strong exports (+0.5%), reflecting weaker domestic demand.
Alongside the growth estimates for the third quarter, monthly figures for September were released. These showed economic activity growing by 0.2%, more than consensus expectations of no growth. Services and construction activity both grew although industrial production was flat.
Overall, the latest reading on the UK economy was slightly better than economists had expected, but not materially so to change the outlook for monetary policy. The Bank of England has warned that interest rates are likely to remain elevated for a prolonged period of time, as inflation has proven to be higher and stickier than expected. The economy is expected to contract in the final quarter of the year, potentially going into a shallow technical recession in early 2024.
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