UK economy teeters on recession edge despite November growth

Economic uncertainty looms: The UK economy experienced slightly stronger growth in November than anticipated, expanding by 0.3 per cent after a 0.3 per cent decline in October, according to data from the Office for National Statistics (ONS). However, concerns persist as output contracted by 0.2 per cent in the three months leading to November, exceeding the expected 0.1 per cent decrease. The ONS warns that a potential contraction or stagnant output in December could lead to a second consecutive quarter of decline, putting the economy on the brink of a mild recession, posing a challenge for Prime Minister Rishi Sunak ahead of the anticipated 2024 election.

Investec economist Sandra Horsfield expressed uncertainty about whether the economy entered a technical recession in the latter part of 2023, characterising the overall trend as one of stagnation. While the recession, if it occurred, appears mild, a contraction in December could contribute to the economic downturn.

The data prompted little change in Sterling against the US Dollar, but government bond yields fell, reflecting increased market expectations of a possible interest rate cut by the Bank of England (BoE) in May.

UK economic struggles

The UK economy faced challenges throughout 2023, grappling with rapid inflation and the highest BoE interest rates in 15 years. Economic output in November only saw a 0.2 per cent increase compared to the previous year, growing by a mere 2.5 per cent since 2019. The economic struggles are not unique to the UK, as much of Europe contends with weakened economic conditions, partly due to the lingering effects of Russia's invasion of Ukraine in February 2022.

Germany's third-quarter economic contraction and a significant drop in industrial output in November raised recession concerns in Europe's largest economy. In contrast, the US experienced robust growth, with an annualised rate exceeding 5 per cent in the third quarter.

Economic recovery and survey indications

While surveys suggest a potential recovery in business activity for December, uncertainties persist. Renewed doctors' strikes could impact healthcare provision, and retail sales remain inconsistent. The Office for Budget Responsibility (OBR) forecasts modest growth for 2023 and 2024, setting a subdued backdrop for the anticipated national election in the latter half of 2024.

Some economists are more optimistic, foreseeing a potential growth pickup in 2024, driven by factors such as lower inflation and interest rates. Finance Minister Jeremy Hunt attributes the current challenges to inflation but believes the tax cuts announced in November will contribute to the country's long-term prospects. Meanwhile, the opposition Labour Party, represented by Rachel Reeves, emphasises the persistently high tax burden relative to GDP, citing it as the highest in 70 years.

(With Reuters Inputs)