Little to celebrate from UK data as economy heads towards recession

(Alliance News) - There was little festive cheer about the UK economy on Friday, the last business day before Christmas, as data showed it on the brink of recession.

"The chancellor might believe that 2024 will be the year the UK throws off its 'pessimism and declinism' but it might also be a year that starts in a recession," warned Danni Hewson, AJ Bell head of financial analysis.

The Office for National Statistics reported second estimates for gross domestic product in the UK.

In the third quarter, the ONS estimates that GDP registered a 0.1% fall quarter-on-quarter, having previously estimated that economic activity had been flat. In the second quarter, the economy saw no growth from the first quarter, revised down from a 0.2% expansion.

The new figures have implications for UK monetary policy as well.

"One of the tools that can be pulled out of the bag to help drive growth is also the instrument the Bank of England has been wielding to hack away at the sticky tendrils of inflation," AJ Bell's Hewson noted.

"If the turgid trend continues, the MPC will come under even more pressure to wrench the taps in the other direction and this new data has prompted markets to start pricing in even more cuts over the next year."

Last week the BoE maintained UK interest rates at a 15-year high, but the decision split policymakers.

The BoE kept the bank rate at 5.25%. It is the third successive hold, following holds in September and November, which had ended a streak of 14 consecutive hikes since December 2021. The BoE had rapidly increased bank rate from a Covid-19-induced low of 0.10%.

December's Monetary Policy Committee vote was hardly unanimous. Six members, Governor Andrew Bailey included, favouring the hold. Three would have preferred rates to have been lifted by 25 basis points; they were Megan Greene, Jonathan Haskel and Catherine Mann.

"The government would certainly like [a cut in interest rates] given 2024 is likely to be an election year, but ultimately the BoE will stick to the narrative of the job is not yet done on inflation and it is too early to be talking about rate cuts," commented Richard Carter, head of fixed interest research at Quilter Cheviot.

"Indeed, the now rumoured February rate cut does seem a little premature given the messaging coming out of Threadneedle Street."

On Wednesday this week, the ONS said the consumer price index rose 3.9% annually in November, cooling sharply from the 4.6% increase recorded in October. The inflation reading came in below FXStreet-cited market consensus of 4.4%.

The recent peak for UK inflation was 11.1% in October 2022, which the ONS estimated to be the highest since 1981. November's reading was the lowest since September 2021.

Victoria Scholar, head of investment at interactive investor, said: "While inflation has come back down closer to the 2% target, it remains almost double where it needs to be, and in absolute terms, prices are still much higher than they were before Russia's invasion of Ukraine. The outlook for 2024 looks shaky with a sluggish consumer, ongoing price increases and more expensive borrowing costs."

By Sophie Rose, Alliance News senior reporter

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