Economy expected to return to growth in November – but risk of recession remains
A resilient retail sector and the return of colder weather will have helped the UK economy return to growth in November, new figures out this week are expected to show.
GDP figures for November will be released on Friday morning with economists expecting that the economy grew by 0.2 per cent. This would follow a 0.3 per cent contraction in October.
Experts pointed to a range of factors behind the likely rebound, including the drop in temperature after an unusually mild October.
“The return to more seasonal (cooler) weather conditions after a mild couple of months may have necessitated a larger-than typical rise in utility output to meet heating needs,” Sandra Horsfield, UK economist at Investec said.
The services sector, which makes up the majority of the UK economy, is also expected to have grown thanks to a surprisingly strong performance from retailers in November.
Retail sales figures, published last week, were comfortably ahead of expectations, in large part due to substantial discounting around Black Friday.
Even if November’s figures show a return to growth, a number of economists warned a recession was still a real possibility.
Having outperformed expectations for much of last year, fears of a contraction resurfaced when revised figures for the third quarter showed the economy had shrunk 0.1 per cent. A technical recession is two consecutive quarters of contraction.
Analysts at Capital Economics warned that a positive performance in November would unlikely be enough. “The full effects of higher interest rates are still filtering through and some of the rebound in retail spending in November is likely to have been temporary,” they said.
“November’s rebound won’t prevent a contraction in Q4,” they concluded.
Similarly, Horsfield warned that November’s “partial recovery…would be too small to prevent a technical recession”.
However, looking into the year ahead there are a number of growing tailwinds to growth which could help stimulate a swift recovery.
Inflation, which fell to a two year low of 3.9 per cent in November, is expected to continue falling fast in the new year, giving households a significant boost in real income.
Analysts at Deutsche Bank predict that real wages will grow at 1.75 per cent in 2024, making it one of the highest growth rates in the last decade.
In response to lower inflation, financial markets have also dialled back expectations for how long interest rates will have to remain high. This in turn has lowered the cost of borrowing for the government, potentially leaving more space for tax cuts in the Spring Budget.
Simon French, UK economist at Panmure Gordon, said “this evolution of prices and the inflection now already underway on debt servicing costs is cautiously encouraging for the prospects of further fiscal stimulus”.