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UK economy stagnates as interest rate rises start to bite

Although the UK’s economic performance was slightly better than economists had expected in Q3, a contraction is expected in Q4, with potentially a shallow technical recession in early 2024.

UK economy stagnates as interest rate rises start to bite


Azad Zangana
Senior European Economist and Strategist

Economic activity in the UK was flat in the third quarter according to preliminary estimates from the Office for National Statistics. Quarterly real GDP growth slowed from 0.2% in the second quarter, although the latest reading was slightly better than consensus expectations of a 0.1% decline. On a quarterly year-on-year basis, GDP growth was unchanged at 0.6% from the previous quarter.

Examining the details of the data reveals a weaker outlook, likely to be impacted by the aggressive rise in interest rates over the past year. Total household spending fell by 0.4% over the quarter adjusted for inflation, with most of the cutbacks happening with goods (-0.8%) rather than services. Although the same quarter a year earlier was even weaker (-0.9%), this was impacted by an additional public holiday and would have distorted the data negatively.

Total investment in the economy fell by 2% in the third quarter, dragged down by private business investment (-4.2%) but partly offset by government investment (4.3%). Business investment was up 8.3% in the previous quarter compared to the end of last year, and so the latest pull-back was not a total surprise. However, private business surveys suggest widespread pessimism over the economic outlook and plans to cut back on spending and investment. We expect to see further declines in private capital expenditure in the coming quarters while business confidence remains low.

There was a small (0.4 percentage point) positive contribution from net trade – the first in a year. However, this was largely due to a decline in imports (-0.8%) rather than strong exports (+0.5%), reflecting weaker domestic demand.

Alongside the growth estimates for the third quarter, monthly figures for September were released. These showed economic activity growing by 0.2%, more than consensus expectations of no growth. Services and construction activity both grew although industrial production was flat.

Overall, the latest reading on the UK economy was slightly better than economists had expected, but not materially so to change the outlook for monetary policy. The Bank of England has warned that interest rates are likely to remain elevated for a prolonged period of time, as inflation has proven to be higher and stickier than expected. The economy is expected to contract in the final quarter of the year, potentially going into a shallow technical recession in early 2024.

This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. 

Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.

This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.

All data contained within this document is sourced from Cazenove Capital unless otherwise stated.


Azad Zangana
Senior European Economist and Strategist


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