January 15th 2024
Inflation: The UK economy is growing but will we avoid a recession?
The latest figures from the Office of National Statistics (ONS) displayed monthly GDP increased in November, helping recover from the decrease seen the previous month.
At the end of last week new figures from the ONS showed that gross domestic product (GDP) increased by 0.3% in November. This news was welcomed with open arms as it was reported previously to have dropped by 0.3% in October.
The increase, which came as a result of the services sector – this rose by 0.4% – was above analyst estimates of 0.2%. Research from the ONS also found production output increased by 0.3%, up from -1.3% in the previous month, while the construction fell at a slightly slower rate of -0.2% instead of -0.4% in October.
These positive figures could point towards the UK economy finally beginning to recover from the effects of the Covid-19 pandemic and energy crisis. In addition, inflation as a whole dropped to 3.9% in November, meaning the UK is no longer considered to be facing exceptionally high rates as opposed to other developed countries.
However, GDP is estimated to have fallen by 0.2% over the three months to November compared to 0.3% in the three months to August. In addition, tight labour markets which have seen companies passing on costs to consumers in a bid to protect their profit margins, could see core inflation remain higher for longer.
KPMG UK – a branch of KPMG International, which is a global network of professional firms providing tax, audit, and advisory services – has forecast a UK GDP growth of around 0.5% in 2024, rising to 1% in 2025. However, one of the biggest deciding factors facing companies this year could be whether to raise prices in order to strengthen profits, or to cut back on staff, if demand does not pick up as expected.
Vice chair and chief economist of KPMG UK, Yael Selfin, said: ‘UK economic activity has outperformed expectations, but the outlook remains weak and vulnerable to shocks. Risks to the outlook are skewed to downside, and stem from more persistent inflation, delayed impact of monetary policy and structural weaknesses of labour supply.’
Against this backdrop, Tim San Wong, global markets associate at Validus Risk Management, claimed that whilst the news is encouraging, authorities should still be striving to lower core inflation rates as they are ‘lingering well above target at 5.1%’.
‘Following an unexpected contraction of -0.3% in October, the UK economy staged a modest recovery with positive growth of 0.3%, coming in above expectations of 0.2%,’ said Tim. ‘On a further positive note, industrial production exhibited resilience with a notable m.o.m. expansion of 0.3%, attributed to increased energy and gas production amid a colder-than-normal November.’
Tim added: ‘Overall, [the] numbers are evidence of an economy in better shape than anticipated. Whilst evidently good news it calls into question markets’ pricing of 120bps of cuts from the Bank of England during 2024.
‘With core inflation still lingering well above target at 5.1%, housing markets continuing to be robust, and economic data coming out above expectations, it is hard to imagine the Bank of England beginning an aggressive cutting cycle.’
Image: Joachim Schnürle
Third time lucky: Bank of England set to hold interest rates following inflation warning
Conservatives conquered inflation rates but the battle for families isn’t over