Like a sailing ship trapped in the doldrums, Britain’s economy is going nowhere. The latest official growth figures for the third quarter of 2023 show the sideways drift of the past 18 months continuing. Without population growth the performance would have been even weaker.
Clearly, higher interest rates are having an impact. The UK economy is heavily reliant on the residential housing market to propel it forwards, and that engine has been shut off as a result of the steady increase in the cost of borrowing from the Bank of England since December 2021.
Residential investment, which is especially sensitive to changes in interest rates, fell by 1.7% in the three months to September and has now dropped for four successive quarters. Household spending also took a hit as consumers tightened their belts.
Meanwhile, the recent encouraging performance of business investment came to an abrupt end, suggesting some of its previous strength was down to companies bringing forward spending before the end of the super deduction tax break earlier this year.
It is unusual for the UK economy to move sideways for so long a period. In the past, it would either have shown signs of recovery by now or fallen into outright recession.
But that’s because typically in previous cycles policy would have been eased. Either the Bank of England would have been cutting interest rates or the Treasury would have been cutting taxes or increasing public spending.
Neither looks probable in the immediate future because of the fear of higher inflation. The economy is doing poorly but not poorly enough for Threadneedle Street’s monetary policy committee to yet contemplate cutting the cost of borrowing. Likewise, Jeremy Hunt has shown no sign that he will be using his autumn statement on 22 November to provide a stimulus package.
The recent revisions by the Office for National Statistics to past gross domestic product data suggest it would be unwise to treat the 0.0% growth in the third quarter and the 0.1% growth in September alone as the last word on the subject.
But the underlying picture is clear. Interest rates will remain at their current level. Housing activity will continue to be muted. Businesses will mothball investment plans. Consumers will count every penny. There is no sign – at home or abroad – of a wind rising that would fill the sails of the economy. Until one does spring up, the economy will flatline – at best.
