UK continues to avoid technical recession

UK GDP data showed a flatlining economy in the third quarter – but not an expected contraction.

Robert Alster, chief investment officer at Close Brothers Asset Management, said this was a “surprise” and would complicate the Bank of England (BoE) interest rate strategy.

“Today’s GDP figures will come as a surprise, showing the economy flatlined in the third quarter, avoiding a contraction. This may complicate the Bank of England’s path, with less of a basis to delay further rate hikes and even consider rate cuts.”

Andrew Bailey, BoE governor, will probably continue to dampen talk of cuts, said Alster, and will stick to the message that interest rates need to remain elevated for quite some time.

Melanie Baker, senior economist at Royal London Asset Management, said the figures were likely to have “little net effect on the Bank of England’s thinking”. According to the Bank’s recently published November Monetary Policy Report, the BoE was expecting flat GDP in Q3 and 0.1% in Q4, she said.

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Although Q3 GDP was “a touch stronger” than expected, there were still falls in consumer spending and business investment, said Baker.

“The contribution to growth from net trade looks to have been much more positive than expected, but partly on the back of falling imports. That itself will likely partly reflect weakness in domestic demand.”

Growth in September was slightly stronger than in August, but less industrial action in the health service and warmer than average temperatures appear to have played some role. The broader run of data still suggests “this is an economy that has grown little since early 2022”.

“The UK continues to avoid going into a technical recession, which would need two consecutive quarters of negative growth, though it clearly wouldn’t take much of a back revision for Q3 GDP to have fallen,” said Baker, adding: “If the UK continues to experience little to no growth, the experience of the economy, including the jobs market, may not be very different than it would have been had the UK experienced short mild recession.”