The UK economy is sinking. The question is for how long and whether the downward surprise in October is repeated in the coming months.
Some analysts responded with a shrug to a 0.3% contraction in gross domestic product (GDP) that followed September’s 0.2% rise, saying it was a one-off decline before an expected rebound in November.
Never mind the broad-based nature of the survey findings, with all three major sectors – manufacturing, services and construction – shrinking. They see the economy as holding up well.
This is the argument of those who say that companies large and small have proved to be resilient in the face of high interest rates, political uncertainty and a deteriorating global situation. There will be bumps along the road but a recession is unlikely.
Tuesday’s labour market figures supported this view. While wages growth slowed and vacancies declined – revealing a weaker demand for workers – the overall picture was one of businesses feeling optimistic enough to hold back on making staff redundant.
There is also much in the detail from the Office for National Statistics’ GDP report to support the resilience argument.
A lack of film and TV production, due in part to the US writers’ and actors’ strikes, played a significant role in dragging down the services sector. The strike is over and production is expected to increase over the coming months.
Other sectors may improve in the festive period to offset a lacklustre performance in harder-hit industries. For instance, manufacturing has been in recession for more than a year but a recent message from the sector’s trade body said companies were preparing for better times in 2024.
This alone, though, cannot make up for a lack of demand from China, which is suffering a weighty slowdown, or a lack of direction in industrial strategy from the UK government.
Rishi Sunak, who made economic growth one of his five pledges for 2023, must be worried that the signals are flashing red, not for a long period of stagnation in a pre-election year, which is bad enough, but a recession.
Neither the Bank of England nor the National Institute of Economic and Social Research have forecast a recession, which is defined as two consecutive quarters of contraction. Yet the backwards step in October may be telling us that one is on the way. With the government willing to continue fighting the doctors’ and train drivers’ unions over pay, the fourth quarter could show a decline and set up the new year for a further period of contraction.
The construction industry faces a disastrous 2024 if the cost of borrowing remains high, and the professions that depend on the property market are likewise going to be hard hit. The October GDP figures show legal services contracted amid a sharp slowdown in the sale of commercial and residential properties.
No doubt the Bank of England’s monetary policy committee will view the monthly GDP drop as a foretaste of recession with some scepticism and will vote on Thursday to keep interest rates at 5.25%.
Eradicating inflation is likely to be worth a shallow recession in the view of most MPC members. It means a shallow recession is what we might get.
