GDP: When is no growth in the economy a good thing?
Ministers may have breathed a sigh of relief today as the UK economy narrowly dodged recession in the third quarter of the year after eking out minor growth in September and August.
But while growth of 0.2 per cent in September and 0.0 per cent across the three months sounds a fairly grim picture for the UK – it actually paints a better one than many expected.
As inflation, cost of living pressures and strikes continue to weigh down the economy, economists had been widely pricing in a contraction in growth over the summer,
However, warmer weather helped boost the country’s ailing construction sector by 0.1 per cent, while services fell by 0.1 per cent and production was flat at 0.0 per cent, with the UK economy appearing to remain stagnant.
Analysts say the government may be relieved by the unexpected flatline.
“The UK economy managed to perform better than expected in the third quarter, thanks in part to growth in September of 0.2 per cent, to record zero per cent growth overall for the full three months,” said Charles Hepworth, Investment Director, GAM Investments.
“While this will hardly set the world alight, it is better than a contraction as expected by most economists.”
The UK was still “worrying close to flirting with one” however, he warned.
Cost of living pressures and the Bank of England’s rate rising cycle have continued drag on the property market and keep the UK economy at subdued levels across the economy, analysts said today.
The Bank of England’s monetary policy committee opted to hold rates at 5.25 per cent this month for the second straight month but any rate cuts are not expected until at least mid way through next year.
Threadneedle Street’s chief economist Huw Pill said this week that rates would need to stay there for an extended period, but market pricing pointing towards a first rate cut in August 2024 “doesn’t seem totally unreasonable”
Wonks said today that high rates continue to drag on the economy but the flat growth is still something of a boost considering the picture of the economy a year ago.
“Subdued is the word du jour,” said Danni Hewson, AJ Bell head of financial analysis.
“All sectors are struggling – there are no stars in this set of figures, no big boosts to offset falls elsewhere.”
However, the turnaround over the past year from a situation in which inflation was “reaching its peak” shows there is “cause for a degree of optimism”. Hewson added.
“No growth suggests a degree of economic resilience, which does mean no stimulate rate cuts are likely in the near term,” she said.
A recession could still be looming however as the economy is battered by inflation and the delayed pain of an interest rate hike. Analysts at Investec warned today that GDP could “decline in both Q4 and Q1 next year” as the impact of the Bank’s rate rising cycle sets in.
“It is possible of course that the monthly numbers begin to strengthen from here and that the UK escapes a recession,” said Investec analyst Philip Shaw.
“But it seems more logical that the economy loses further momentum as the impact of higher interest rates intensifies and we note that surveys have become progressively more downbeat recently with, for example, the composite PMI languishing below the key 50 level since August.”