The UK economy fared better than expected in the third quarter, avoiding a contraction, but made no progress either, according to figures from the Office for National Statistics on Friday.
In the third quarter, the ONS estimates that gross domestic product registered no growth on a quarterly basis and was flat on the second quarter. The estimate was better than the FXStreet-cited market consensus of a 0.1% contraction. In the second quarter, GDP grew 0.2% from the first quarter.
Michael Field, Europe market strategist at Morningstar says: “While this level of growth is far from robust, the important thing here is that the UK economy is in the black, and flat growth quarter on quarter means that the UK will not enter a technical recession in 2023.
“With interest rates at the highest level since the global financial crisis, the cost of interest on debt is really starting to bite for both businesses and households. With interest rates likely to stay high for an extended period of time, it is hard to see any quick reversal on service spending, meaning low GDP growth may persist for some time yet.”
Services sector output fell 0.1% over the third quarter, which entirely offset a 0.1% increase in construction output. Production sector output was broadly flat, the ONS explained.
On an annual basis, GDP grew 0.6% in the third quarter, coming in above forecasts of 0.5% growth. GDP had also grown 0.6% annually in the second quarter.
The UK economy grew 0.2% in September from the previous month, picking up the pace from the 0.1% expansion seen in August from July, the ONS said. Market forecasts had expected a 0.1% contraction for September, while August's figure was revised down from 0.2%.
In September, services output rose 0.2%, which the ONS explained was driven by growth in professional, scientific and technical activities, and by human health and social work activities. It was the main contributor to the growth in GDP over the month. Services output had grown by 0.3% in August.
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Emma Mogford, fund manager, Premier Miton Monthly Income Fund, said: “A flat economy isn’t usually something to cheer about. However, given the pressures from the cost-of-living crisis and higher interest rates, it’s a decent outcome. While pressures from higher rates remain, I think we can go into the festive season with a dash of optimism about the British economy.”
Nathaniel Casey, investment strategist at wealth manager Evelyn Partners: “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 Bank of England to cut rates sooner than expected.”
Rob Morgan, chief investment analyst at Charles Stanley: “Consumer spending has so far been held up by lower fuel prices alongside low unemployment levels and strong wage growth, though these factors may not be enough to stave off tighter financial conditions and recessionary pressures in coming months.
“Today’s data will be influential in the Bank of England December’s monetary policy outlook, and it most likely means a holding pattern for interest rates. While economic cracks are appearing, overall activity is holding up reasonably well, which means inflationary pressures may not abate quite as quickly as the BoE would like. The numbers aren’t strong enough to bring a further rate rise from the current 5.25% into play, but it will temper calls for earlier cuts a little too.”
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