The UK Economy Expects A Decline And Is Gearing Up For Recession
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The UK is expected to be the only major industrialized country whose economy will contract this year.
GDP forecast
After UK economic output QoQ declined by 0.3% in Q3, many economists expected a similar contraction in Q4. The decline in the third quarter of last year was, according to the Office for National Statistics, partly due to an extra day off in September 2022 for the state funeral of Her Majesty Queen Elizabeth II as some businesses were closed or operating differently that day. The pause in economic activity on September 19, the day of the funeral, contributed to a monthly fall in GDP of 0.8% in September.
This was followed by a rebound in October when the UK economy grew by 0.5% month on month. The economy grew a further 0.1% m/m in November, beating expectations of a 0.1% decline as the football world cup in Qatar boosted the UK services sector which grew by 0.2% compared to October. The customer services sector, which includes pubs and other food outlets, recorded an increase of 0.4%.
Given the positive GDP growth in October and November and the fact that the World Cup lasted until December 18, it is possible that the UK narrowly avoided a decline in GDP in the fourth quarter, keeping the country from falling into recession.
Source: investing.com
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When comparing the 2022 quarter to the 2021 quarter, the UK economy is estimated to contract from 1.9% to 0.4% in the fourth quarter.
GDP YoY Chart Source: investing.com
UK in recession?
According to the Office for Budget Responsibility, the UK is already in recession.
Moreover, manufacturing fell by 0.2%, suggesting that while the fourth quarter as a whole may now show modest growth, the outlook for the future remains challenging, especially given that a reduction in service consumption is expected as the cost of living crisis intensifies this year. The trajectory of the central bank's aggressive monetary policy tightening appears to hold in the short term as inflation continued to hit double digits in November, albeit declining slightly from its 41-year high in October.
Combined with the cost of living crisis caused by soaring food and energy prices, widening industrial action and unprecedented pressure on the nation's health service, consumers' purchasing power is unlikely to survive beyond the Christmas treat. The increased cost of credit is likely to put further downward pressure on activity.
The Bank of England predicts that the British economy will experience at least four quarters of recession. The bank now predicts that the economy will contract by 1% from 3% and that inflation will fall back to 8% in June before dropping to 3% at the end of the year.
The forecast comes as interest rates were raised to 4% from 3.5%, the highest level in more than 14 years.
On Thursday, the Bank hinted that interest rates may be approaching a peak, indicating that it will only raise them if it sees signs that inflation will remain high. Bank governor Andrew Bailey said inflation appeared to be coming down but warned that there were still "big risks" that could still affect the economy.
Higher interest rates are designed to encourage people to save more and spend less, helping to stop prices from rising as rapidly.
Thursday's increase in the cost of credit is the tenth in a row and will add pressure on many households already struggling with the cost of living.
The impact will be felt by borrowers through higher mortgage and credit costs, although this should also mean better returns for savers.
Source: investing.com
