British economy shows modest growth in November amid recession risks

UK economic growth: The UK's economy demonstrated a slight recovery in November, growing by 0.3 per cent, surpassing expectations of a 0.2 per cent increase, according to data from the Office for National Statistics (ONS). Despite this positive development, the three-month output contracted by 0.2 per cent, higher than the anticipated 0.1 per cent decline, raising concerns about the possibility of entering a mild recession. The contraction in December could result in a second consecutive quarter of falling output, placing additional pressure on Prime Minister Rishi Sunak ahead of the expected 2024 elections.

Economic landscape and global comparisons

The UK economy faced challenges throughout 2023, with households feeling the impact of inflation and the Bank of England's highest interest rates in 15 years. The European economy, including Germany, showed signs of weakness, partly influenced by the aftermath of Russia's invasion of Ukraine in 2022. In contrast, the US economy exhibited robust growth, surpassing 5 per cent in the third quarter.

Economists suggest that the UK's economic situation is on a precarious edge, with a potential technical recession in late 2023. The mild recession, if it occurred, appears to have had minimal impact. However, the longer-term trend indicates stagnation, with the economy showing little growth over the past year.

Market reactions and expectations

Market reactions to the data were mixed, with Sterling remaining stable against the US Dollar. However, government bond yields fell as markets factored in a slightly increased likelihood of the Bank of England implementing interest rate cuts in May.

Outlook for 2024

Despite the challenges, there are hopes for a better economic performance in 2024. The Office for Budget Responsibility (OBR) has forecasted modest growth, and some economists anticipate a pickup in growth due to lower inflation and interest rates. Finance Minister Jeremy Hunt acknowledged the current impact of inflation on growth but highlighted the positive prospects of tax cuts for businesses and workers announced in November.

International Focus and Monetary Policy

Investors are closely monitoring signals from the US Federal Reserve for insights into the global interest rate outlook. Expectations of aggressive rate cuts persist, with a 60 per cent likelihood of a March rate cut priced in. ING Bank noted the potential short-term vulnerability for risk assets from a hawkish repricing.

Looking ahead, Fed Governor Christopher Waller is scheduled to speak on Tuesday, and US retail sales data on Wednesday will offer additional cues on the US central bank's monetary policy strategy.

(With Reuters inputs.)