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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

UK a ‘stagnation nation’ after economy fails to grow; Alison Rose to lose £7.6m over Farage row – as it happened

United Kingdom GDP Economy United States
People dining outside a cafe in Royal Tunbridge Wells, Ken.
People dining outside a cafe in Royal Tunbridge Wells, Ken. Photograph: Realimage/Alamy

Afternoon summary

Time for a recap

The UK has been dubbed a ‘stagnation nation’ after failing to grow over the summer.

The economy was flat in the three months to September, the latest GDP data shows, with the dominant services sector contracting slightly.

Announcing the news, ONS director of economic statistics Darren Morgan said:

“The economy is estimated to have shown no growth in the third quarter.

“Services dropped a little with falls in health, management consultancy and commercial property rentals.

“These were partially offset by growth in engineering, car sales and machinery leasing.

“In the month of September the economy grew slightly, with increases in film production, health and education.

“This growth was partially offset by falls in retail and computer programming.”

The data was slightly better than expected, but highlights the damage that high interest rates are having on growth.

It means the UK fell behind the US and France, but did a little better than Germany and the wider eurozone.

Chancellor Jeremy Hunt said inflation was the main barrier to growth, while shadow chancellor Rachel Reeves warned that “growth is flatlining and Britain is worse off.”

Here’s the full story:

And analysis from Larry Elliott:

In other news…

European stock markets are in retreat today, on fears that US interest rates may not have peaked.

The Bank of England has asked more than 50 City institutions to model the impact of a sharp movement in bond prices caused by a severe geopolitical shock as part of its first financial system-wide stress test.

NatWest has scrapped almost £7.6m in potential payouts to Alison Rose, the banking group’s former chief executive, who was forced to resign over a scandal linked to the closure of Nigel Farage’s bank accounts.

The Guinness to Johnnie Walker drinks maker Diageo has issued a profit warning as a result of cash-strapped customers in Latin America and the Caribbean consuming less alcohol and seeking cheaper brands.

Vehicle breakdowns caused by Britain’s pothole-ridden roads reached record levels this year, according to the RAC.

The Industrial and Commercial Bank of China’s US arm was hit by a ransomware attack that disrupted trades in the US Treasury market on Thursday, the latest in a string of victims ransom-demanding hackers have claimed this year.

FTSE 100 on track for worst day since August

European stock markets have sunk deeper into the red, after Federal Reserve chair Jerome Powell hinted last night that US interest rates may not have peaked.

In London, the FTSE 100 index is now down just over one hundred points, or 1.35%, at 7354, on track for its biggest one-day loss since August.

David Morrison, senior market analyst at fintech and financial services provider Trade Nation, says:

Federal Reserve Chair Jerome Powell upset the apple cart during a speech yesterday evening.

He stated that the Fed wasn’t confident that it had done enough to tame inflation leaving the door open for further rate hikes. This wrongfooted traders who had convinced themselves that the US central bank was done hiking rates. It now looks as if that was wishful thinking.

The display of freshly baked artisan bread in Booths, at Ripon, North Yorkshire.
The display of freshly baked artisan bread in Booths, at Ripon, North Yorkshire. Photograph: Peter Jordan_F/Alamy

Supermarket chain Booths, one of the (many) great things about the glorious north of England, is to axe almost all of the self-service tills in its stores, saying the decision was in response to feedback from customers.

Booths, an upmarket supermarket chain, said it believed staff serving customers delivered a better customer experience and had therefore taken the decision to remove self-checkouts from all but two of its 28 stores.

Nigel Murray, managing director of Booths, told BBC Radio Lancashire that customers had told the firm that its self-scan machines can be slow and were unreliable and impersonal.

Murray said:

“We like to talk to people and we’re really proud that we’re moving largely to a place where our customers are served by people, by human beings, so rather than artificial intelligence, we’re going for actual intelligence.”

More here.

The Bank of England has asked more than 50 City institutions to model the impact of a sharp movement in bond prices caused by a severe geopolitical shock as part of its first financial system-wide stress test.

The request comes after the September 2022 crisis in bond markets and sterling that followed Liz Truss’s mini-budget, when pension funds came under pressure and some were driven to near-collapse. A sharp shift in bond prices and the corresponding interest rates, or yields, laid bare major risks that certain kinds of liability-driven investing (LDI) posed to retirement savings.

Big banks, asset managers, hedge funds, pension funds and major insurers have now been asked to model how their operations might be affected by an unexpected swing in bond prices, sharing the results with the central bank by January.

More here.

Some long-term context on GDP:

Today’s GDP report provides “some comfort” as the UK heads into a winter in which worries about a Bank of England-led recession are likely to dominate headlines, says Holger Schmieding, chief economist at Berenberg:

As part of a broader European story, the UK economy has struggled to produce any real growth since early 2022 as two overlapping shocks intercepted a solid rebound from the pandemic-driven recession.

The first of the shocks, namely from surging gas prices in the wake of the Russian invasion of Ukraine in late-February last year, had mostly faded by summer 2023. But just as this shock started to ease, the cumulative impact of the Bank of England’s (BoE’s) aggressive monetary tightening to curb inflation began to weigh on demand.

But, Schmieding adds that K GDP has regularly beated consensus expectations over the last year, amounting to a cumulative 0.7 percentage points of upside surprises.

He argues there is a case for “modest” optimism over the outlook:

After a flat H2 2023, we expect a gradual pick-up of momentum through 2024 from a qoq rate of 0.2% in Q1 to a trend rate of c0.4% by Q4, with sustained gains at trend through 2025.

Our annual real GDP calls for 2023, 2024 and 2025 are 0.5%, 0.7% and 1.7% respectively

A chart showing UK GDP

The head of the European Central Bank has indicated it isn’t in a rush to start cutting interest rates.

Speaking at the Financial Times Global Boardroom conference today, Christine Lagarde said eurozone inflation will fall to its 2% target if borrowing costs are kept at their current levels for “long enough”, adding:

“It is not something that [means] in the next couple of quarters we will be seeing a change. Long enough has to be long enough.”

A blockade of BAE Systems in Rochester called by Workers For A Free Palestine today
A blockade of BAE Systems in Rochester called by Workers For A Free Palestine today Photograph: Guy Smallman/Getty Images

Weapons maker BAE Systems is the top riser on the FTSE 100 so far today, up 1.8%.

They’ve gained almost 30% this year, as geopolitical risks have risen.

But the company’s factory in Rochester,Kent, has been blocked by a group of pro-Palestinian protesters this morning, urging Britain’s biggest military supplier to end arms sales to Israel.

Holding up a sign saying “Stop Arming Israel” and waving Palestinian flags, about 50 people stood in front of one entrance at the Rochester, Kent, site, where BAE tests and assembles electronic equipment used on military aircraft and in surveillance systems, Reuters reports.

Tens of protesters gathered at other entrances.

BAE said it does not directly export any equipment to Israel, but the group is a tier-one supplier on the United States-made F-35 fighter jets which are flown by Israel.

A BAE spokesperson said.

“We’re horrified by the situation in Israel and Gaza and the devastating impact it’s having on civilians in the region and we hope it can be resolved as soon as possible,”

“We respect everyone’s right to protest peacefully. We operate under the tightest regulation and comply fully with all applicable defence export controls, which are subject to ongoing assessment.”

Alison Rose has commented on NatWest’s announcement about her pay, saying:

“I am pleased that NatWest Group has confirmed that no findings of misconduct have been made against me.

I can also confirm acceptance of the terms of the settlement agreement, which is in line with NatWest Group’s remuneration policy, bringing the matter to a close.”

The news that the UK economy avoided shrinking in the last quarter could encourage the Bank of England to leave interest rates unchanged until well into 2024.

The financial markets currently predict rates will remain on hold at 5.25% until May or June next year.

Daniela Hathorn, senior market analyst at Capital.com, explains:

“The UK economy failed to grow in the third quarter but avoided falling into recession as markets were predicting. Q3 GDP released this morning came in at 0%. In the three months to June, the economy grew 0.2%. The data suggests that high borrowing costs are slowing economic activity while the cost-of-living crisis continues to weigh on household spending.

The reading was better than markets were anticipating, with a contraction (-0.1%) priced in for Q3. This allowed GBP [the pound] to halt some of the recent losses this morning, with GBP/USD finding some support along the descending trend line that was acting as prior resistance.

The data is likely to have eased fears that the Bank of England’s tightening has pushed the economy into recession which falls in line with expectations that rate cuts won’t be necessary until Q3 2024. That said, a stagnating economy is not a good sign when inflation remains above 6%. It also suggests that the economy is not weak enough to significantly slow down core inflation.”

Today’s GDP report shows that output in consumer-facing services is still 4.9% below its level in February 2020, just before the first Covid-19 lockdowns.

The rest of the services sector is 7.4% above its pre-pandemic levels, though.

The NIESR research institute has predicted the UK economy will grow by 0.1% in the current quarter.

They say:

We now forecast GDP to grow by 0.1 per cent in the fourth quarter of this year, entailing our central forecast does not expect a recession in 2023. These forecasts remain broadly consistent with the longer-term trend of low, but stable economic growth in the United Kingdom.

Major stock indexes in Britain and Italy provided by FTSE Russell suffered a brief outage this morning.

But they’ve now resumed operating properly, LSEG, the index provider’s parent says.

Three week ago, an incident also disupted trading in some stocks on the London Stock Exchange.

Why shrinking real money growth could mean a recession

Today’s bigger picture is that UK GDP growth has run out of steam, explains Professor Costas Milas, of the Management School at University of Liverpool.

He tells us:

The Bank of England’s policymakers will argue, and rightly so, that monetary tightening is working.

What is worrying, however, is that the UK economy is “flirting” with recession. To see this, just “follow the money” not only to see what is happening to UK inflation but also to growth.

The Chart below plots real Divisia M4 (q-on-q4) growth together with real GDP (q-on-q4) growth. Real money growth affects GDP developments with long and variable lags. In fact, real money growth turned negative in mid-2022. Since then, real money has shrunk fast.

This is very likely to push the UK into recession by early 2024 and, therefore, interest rate cuts might happen earlier than the BoE’s policymakers (seem to) think.

A chart showing real divisia money growth and GDP

UK GDP: latest reaction

Lydia Prieg, Head of Economics at the New Economics Foundation, says the UK remains the ‘sick man of the rich world’, following today’s GDP report showing no growth in July-September.

Prieg explains:

“Today’s growth figures tell the same old story: the UK is the sick man of the rich world. We have one of the weakest post-pandemic recoveries in the G7. Why? Because a lack of investment over the past decade made us a poorer nation today.

“We have some of the highest energy bills in the world, which means less money for people to spend in the shops. Why? Because this government did not invest in insulation and renewables. Our workforce is shrinking because falling investment in our NHS meant people are too sick to work. A lack of public investment in green industries and infrastructure has led to lower wages at home.

We need to invest to make the British people more prosperous. Invest in renewables and home insulation to get energy bills down. Invest in the NHS and schools so that healthy, well-educated adults can actually go to work. And invest in green industry and infrastructure to get growth and wages rising again.”

Henry Cook, senior economist at Japaness bank MUFG, says the broader picture remains one of stagnation, adding:

A recession has so far been avoided but growth has been muted for six quarters now.

Our base case is that growth will continue to trundle along a flat or weakly positive trajectory into 2024, with a good chance of a contraction in at least one quarter. Overall, we expect the broader picture of stagnation will remain in place next year with 2024 annual growth around 0.5%.

The headline figure of 0% growth masks a “very weak picture”, explains Cathal Kennedy, senior UK economist at RBC Capital Markets.

The main positive contribution to third quarter GDP came from net exports (see Exhibit 1), exports rising 0.5% q/q due in the main to a rise in services exports. Imports (reflecting weaker domestic demand, see below) on the other hand fell 0.8% q/q. Inventories also rose.

Domestic activity was very weak, however. Household consumption fell by 0.4% q/q, investment (GFCF) fell 2.0% q/q, government consumption was down 0.5% q/q. In the case of the latter two that was a reaction to idiosyncratic factors; strikes in health and education suppressing government consumption, the end of the super-deduction allowance at the end of March which had seen business investment pulled forward into Q2.

A chart showing UK GDP

Heads-up: Microsoft has warned that some users in the UK and German may not be able to access its Microsoft 365 suite of products.

That potentially includes online versions of Word, PowerPoint, Excel, and OneNote.

Updated

Full story: NatWest scraps more than £7.5m of Alison Rose’s payout after Farage scandal

Alison Rose will receive almost £1.75m from NatWest by next summer, 12 months after her resignation.

NatWest says:

The Board has confirmed that, in line with Ms Rose’s service agreement, payment of her fixed pay elements will be made for the remainder of her contractual notice period, which will end on 26 July 2024.

These contractual elements comprise salary, fixed share allowance and a pension allowance of 10% of salary and contractually agreed benefits in line with the terms of our approved Directors’ Remuneration Policy (DRP).

The total value over the remainder of the notice period is £1,748,142.

NatWest: Alison Rose foregoes £7.6m over Farage bank account row

Newsflash: NatWest has confirmed it is scrapping most of a potentially £10m-plus payout to Alison Rose, the banking group’s former chief executive.

Rose, who was forced to resign over a scandal linked to the closure of Nigel Farage’s bank accounts, is losing almost £7.6m of bonuses, unvested share awards and variable pay.

NatWest says it has not made any finding of misconduct against Rose, who was forced to resign over a leak to a BBC news journalist about the threatened closure of Nigel Farage’s bank account at Coutts, owned by NatWest.

But, Rose did not achieve “good leaver” status under the terms of its share award plan.

NatWest says:

Following the announcement that Ms Rose stepped down from her role by mutual agreement, it has been confirmed that good leaver status is not applicable under the relevant share plan rules.

Thus, unvested share awards worth £4.7m will lapse.

Rose will also not receive a bonus or variable remuneration for her work in 2023, before her resignation in late July. She could have received up to £2.86m, had she hit relevant performance conditions.

Updated

Economist Douglas McWilliams, the founder and deputy chairman of the CEBR, points out that growth over the last year is minimal once you account for rising population:

Analysis: UK economy continues sideways drift

Like a sailing ship trapped in the doldrums, Britain’s economy is going nowhere, our economics editor Larry Elliott writes:

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.

Here’s Larry’s full analysis:

Full story: UK economy flatlines in third quarter amid high interest rates

The UK economy flatlined between July and September, compared with the previous three months, as the impact of high interest rates and inflation weighed on consumers and businesses.

Zero growth in gross domestic product in the third quarter followed 0.2% growth in the second quarter, the Office for National Statistics said.

A slowdown in the property sector after a slump in house sales dragged down the services sector, while the transport sector also suffered a downturn, indicating that firms cut back on shipping goods across the country.

Most business surveys have shown falls in output and employment in recent months in reaction to falling consumer demand in the UK and elsewhere in Europe.

An increase in interest rates has dampened consumer spending, with many retailers signalling that they are prepared for a difficult festive period.

Inflation was unchanged at 6.7% in September, reducing the spending power of many workers who received pay rises below the consumer prices index.

Suren Thiru, the economics director at the Institute of Chartered Accountants in England and Wales, said:

“Flatlining quarterly UK GDP suggests that our economy lost momentum as the squeeze from inflation and higher borrowing costs suffocated output.”

More here:

Reeves: Conservatives have failed to deliver on economy

Shadow chancellor Rachel Reeves says:

The Conservatives have had thirteen years to deliver on the economy - and they have failed.

Growth is flatlining and Britain is worse off. Only Labour has a plan to make working people better off.

Updated

Handelsbanken: Damp weather and strikes capped UK economic activity

Getting back to the UK economy…. it’s worth remembering that damp weather and strikes both hit economic activity over the summer

James Sproule, chief UK Economist at Handelsbanken, says these factors need to be considered when assessing why the UK flatlined in the third quarter of the year.

Sproule says:

Firstly there were a number of public sector strikes in September, which will have dampened output. Secondly, the wet, albeit warm, weather that dominated the latter part of this past summer will have dampened consumption and put off shopping for the autumn.

The more positive news is that real earnings continue to increase, forecast to rise by 1% in Q4, and as such this should slowly boost consumer confidence (there is ample scope for improvement) and expenditure. Overall our view is that GDP is flat and that the inevitable minor variations we are seeing result in much talk of recession, but the broader picture is one of stagnation, a picture we see as remaining relevant through 2024.

China's biggest lender ICBC hit by ransomware attack

A ransomware attack has caused disruption to the massive market in US government debt.

The US arm of Industrial and Commercial Bank of China (ICBC) was hit by a cyber attack that disrupted trades in the US Treasury market.

It’s the latest example of hackers disrupting a computer system and demanding a ransom, following attacks on Royal Mail and the Guardian over the last year.

China’s foreign ministry said today that ICBC is striving to minimise risk impact and losses after the attack.

Ministry spokesperson Wang Wenbin told a regular news conference:

“ICBC has been closely monitoring the matter and has done its best in emergency response and supervisory communication.”

The FT says the attack prevented ICBC from settling Treasury trades on behalf of other market participants, according to traders and banks, with some equity trades also affected.

Diageo shares drop 10% after profit warning

Diageo owned whiskies on a bar at their headquarters in Edinburgh.
Diageo owned whiskies on a bar at their headquarters in Edinburgh. Photograph: Andrew Milligan/PA

Shares in drinks company Diageo have tumbled 10%, after it issued a profits warning this morning.

Diageo, which makes Johnnie Walker whiskey, Tanqueray gin, Smirnoff vodka, Captain Morgan rum, Guinness stout and Baileys, told the City its performance in Latin America and Caribbean (LAC) had weakened.

Macroeconomic pressures in the LAC region are resulting in lower consumption and consumer downtrading, Diageo warned.

But in Europe, growth continues to be strong “despite geopolitical tensions escalating in the Middle East, where we are a leading spirits company”, Diageo adds.

Diageo now expects organic operating profit growth for the first half of the 2024 financial year to decline, compared to the first half of fiscal 23.

Victoria Scholar, head of investment at interactive investor, says:

While alcohol is typically viewed as a relatively economically resilient part of the market, shares in Diageo have struggled lately, down almost 20% year-on-year including today’s decline, which has sent the stock to the bottom of the FTSE 100 as consumer spending on drinks in bars, restaurants and clubs weakens in certain geographies.”

Updated

Stocks weaker in London

Shares have dropped in early trading in London, amid fears that interest rates have not yet peaked.

The FTSE 100 index of blue-chip shares has dropped by 0.66%, or 49 points, to 7406 points.

European markets are also lower, with the pan-European Stoxx 600 index down 0.5%.

Investors are jittery, after America’s top central banker warned last night that policymakers “are not confident” interest rates are high enough to bring inflation down to the Federal Reserve’s 2% target.

More happily, research institute the National Institute of Economic and Social Research expects the UK can avoid a recession, despite the lack of growth in the last quarter.

Paula Bejarano Carbo, NIESR’s associate economist, says:

“Today’s data indicate that GDP grew by 0.2% in September relative to August, driven mainly by growth in the services sector.

More broadly, GDP remained flat in the third quarter of 2023 relative to the second quarter, as services output fell by 0.1%, production output remained flat and construction output grew by 0.1%.

These figures are consistent with our forecast in our recent Autumn UK Economic Outlook, published earlier this week, in that the outlook for UK GDP growth remains sluggish and we do not expect a recession to ensue in the short or medium-term.”

TUC: UK is teetering on brink of recession

The TUC fears that the UK is ‘teetering on the brink of recession’, with a bleak economic outlook, after GDP failed to grow in the last quarter.

TUC General Secretary Paul Nowak said:

“Working people are paying the price for Tory failure.

“Today’s dismal growth figures - with household, government and business spending all falling - is yet more evidence of their economic mismanagement.

“The outlook is bleak. The UK is teetering on brink of recession with unemployment rising and no real green shoots on the horizon.

“We can’t go on like this. Jobs and livelihoods are on the line.

“We need a serious plan for jumpstarting our stagnant economy. That means a proper industrial strategy and investment in green infrastructure and public services.

“And this means a change of government.”

ONS: The economy is estimated to have shown no growth in the third quarter

ONS director of economic statistics Darren Morgan says:

“The economy is estimated to have shown no growth in the third quarter.

“Services dropped a little with falls in health, management consultancy and commercial property rentals.

“These were partially offset by growth in engineering, car sales and machinery leasing.

“In the month of September the economy grew slightly, with increases in film production, health and education.

“This growth was partially offset by falls in retail and computer programming.”

Updated

UK a ‘stagnation nation’ at real risk of a recession, says Resolution

The UK is a ‘stagnation nation’ at real risk of a recession, says the Resolution Foundation thinktank.

Following today’s GDP report, James Smith, Research Director at the Resolution Foundation, explains:

“The UK economy has stagnated again in recent months, driven in part by the rapid rise in interest rates since late 2021. There is a real risk that the UK could fall into recession for the fourth time in 15 years.

“Britain is a stagnation nation that has struggled to secure sustained economic growth since the financial crisis. Addressing this is the central task we face as a country, and must be at the heart of the Chancellor’s Autumn Statement in 10 days’ time.”

Updated

International comparisons

Britain’s failure to grow in the last quarter compares poorly to the US economy, which had a strong three months.

But it’s better than Germany, and the wider eurozone, which both shrank a little.

Here’s the latest data we have for Q3 GDP in major advanced economies:

ING: UK economy has largely stagnated this year

Although UK GDP in July-September was a little better than expected, the economy has largely stagnated this year, says James Smith, developed markets economist at ING.

We shouldn’t make too much of the fact that the UK economy performed a little better than expected in the third quarter. The level of real GDP was flat relative to the second quarter, compared to consensus and our own expectation of a 0.1% decline.

The details reveal that the economy was rescued by net imports, a category that tends to be pretty volatile between quarters. Other key areas – notably consumption and business investment – were negative on the quarter. But we also have to remember that it’s been a fairly wild few months for several key sub-sectors of the GDP figures. June saw a massive 0.7% rise in activity, owing to a highly unusual surge in manufacturing. And July saw a corresponding 0.6% drop as that production boost partly unwound, but also on a number of public sector strikes in health/education.

What’s happened since – with GDP growing by 0.1% in August and 0.2% in September – is as much about those trends unwinding as it is about genuine economic activity growth.

Paul Dales, chief UK economist at Capital Economics, has spotted that the UK economy did slightly shrink in the last quarter.

But the ONS has rounded this to a 0% change in GDP #maths

Dales told clients:

The Q3 GDP figures will spark a big debate about whether or not the economy is in recession (the published growth rate was 0.0%, but GDP actually declined by 0.02% or £173m), but the key point is that the economy is not weak enough to reduce core inflation and wage growth quickly. As such, we don’t expect the Bank of England will be able to cut interest rates until late in 2024 rather than in mid-2024 as widely expected.

The recent relative resilience of the economy has continued with the 0.2% m/m rise in real GDP in September and the 0.0% q/q Q3 figure both beating the consensus forecasts of -0.1% m/m and -0.1% q/q respectively.

The breakdown of Q3 GDP, however, suggests that the drag from higher interest rates is growing.

Today’s GDP report weakens the argument that the UK is already in recession, says Simon French, chief economist at UK investment bank, Panmure Gordon.

UK grew by 0.2% in September

In September alone, the economy grew by 0.2%, better than the 0% growth expected.

The ONS says:

  • Services output rose by 0.2% in September 2023, driven by growth in professional, scientific and technical activities, and human health and social work activities, and was the main contributor to the growth in GDP; this follows growth of 0.3% in services output in August 2023, revised down from growth of 0.4% in our previous publication.

  • Output in consumer facing services fell by 0.2% in September 2023 after a fall of 0.7% in August 2023, revised down from a fall of 0.6% in our previous publication.

  • Production output showed no growth in September 2023 after falling by 0.5% in August 2023, revised up from a fall of 0.7% in our previous publication.

  • The construction sector grew by 0.4% in September 2023 after a fall of 0.8% in August 2023, revised down from a fall of 0.5% in our previous publication.

But August’s GDP data has been revised down to show growth of just 0.1%, not the 0.2% growth previously estimated.

Flatlining GDP shows impact of high interest rates

High interest rates hit UK growth in the last quarter, says Jeremy Batstone-Carr, European strategist at Raymond James Investment Services:

“ONS data released today reveals flatlining in GDP, reflective of the lagged effect of the Bank of England’s aggressive rate hikes on economic activity. These figures represent a grinding continuation of the UK’s lacklustre economic performance, a period of weakness stretching back more than two years.

The data shows that fragility has permeated across economic sectors. Stagnation in the service sector has coincided with weakness in construction activity and manufacturing production and output. Industrial action by doctors and rail workers has contributed to a weak outturn from the transportation and healthcare sector, while weak high street activity has contributed to downbeat service sector performance, which was already dampened by squeezed consumer spending even as inflationary pressures abate.

Nonetheless, there is a glimmer of encouragement in today’s trade data. Export volumes rose more than import activity, supported by the sterling’s resilience against trading counterparts.

Britain’s trade deficit has narrowed, as imports into the country fell over the summer.

The ONS reports that the trade in goods and services deficit narrowed by £7.1bn to £6.0bn in Quarter 3 (July to Sept) 2023.

It adds:

  • The value of goods imports decreased by £2.9bn (6.2%) in September 2023, with falls in imports from both EU and non-EU countries.

  • The fall in imports was mainly the result of lower imports of machinery and transport equipment from the EU and reduced fuel imports from non-EU countries.

  • The value of goods exports decreased by £0.9bn (2.9%) because of falls in exports to both EU and non-EU countries.

Hunt: inflation is biggest barrier to growth

The chancellor, Jeremy Hunt, has blamed high inflation for the UK’s lacklustre economic performance.

Following the news that GDP stagnated in July-September, Hunt says:

“High inflation is the single greatest barrier to economic growth.

The best way to sustainably grow our economy right now is stick to our plan and knock inflation on its head. The Autumn Statement will focus on how we get the economy growing healthily again by unlocking investment, getting people back into work and reforming our public services so we can deliver the growth our country needs.”

Growth in the UK’s factory sector slowed sharply in the last quarter.

Today’s GDP report shows that manufacturing output increased by 0.1% in July-September, following growth of 1.9% in the previous quarter.

The largest positive contribution came from the manufacture of transport equipment, following strong car production this year.

Real estate and transport & storage shrank

The UK’s service sector contracted by 0.1% in the last quarter, driven by a drop in activity in the real estate sector, and in transportation and storage.

That shows the impact of higher interest rates on the economy, leading to a drop in house sales, and dampening business activity.

The ONS says:

The largest contributions to the fall were from a decline of 0.4% in real estate activities and a 1.2% fall in the transportation and storage subsector.

Within real estate activities, the largest fall was in buying and selling, renting and operating of owned or leased real estate, which fell by 1.6%. Within transportation and storage, there were falls in five out of six of the industries.

Updated

The zero growth recorded in July-September is the UK’s worst quarterly performance in a year, since the economy contracted in Q3 2022.

UK quarterly GDP chart

UK GDP: the main points

Here are the key points from this morning’s assessment of the UK economy.

  • UK gross domestic product (GDP) is estimated to have shown no growth in Quarter 3 (July to Sept) 2023, following an increase of 0.2% in the previous quarter.

  • GDP is estimated to have increased by 0.6% in Quarter 3 2023 compared with the same quarter a year ago.

  • In output terms there was a 0.1% fall in the services sector, which offset a 0.1% increase in construction output and broadly flat output in the production sector.

  • In expenditure terms, an increase in the volume of net trade was offset by falls in business investment, household spending and government consumption.

  • Compared with the same quarter a year ago, the implied GDP deflator rose by 7.9%, largely reflecting a fall in the implied price of imports, which contributes positively to the implied GDP deflator.

UK economy stagnated in third quarter of 2023

Newsflash: The UK economy stagnated in the last quarter.

The Office for National Statistics has just reported that GDP was unchanged in July-September, compared to the previous quarter.

That’s slightly better than the 0.1% contraction expected by City economists, but shows the economy flatlined over the summer.

The ONS says that the services sector shrank slightly, while construction expanded a little:

Emma Wall, head of investment analysis & research at Hargreaves Lansdown, predicts UK GDP was flat over the last quarter.

But the more important issue is the economic outlook, she argues, with several economists predicting a small uplift in the fourth quarter (thanks to Christmas and Diwali).

But then, the economy is seen “retracting” in 2024.

Wall told Radio 4’s Today programme:

There are predictions that we will enter a recession next year, albeit most are saying it will be a soft landing, but still a technical recession.

Today’s UK GDP report will provide “cold comfort”, even if the economy avoids shrinking, predicts Ben Laidler, analyst at trading and investment platform eToro.

The economy may skirt recession for a further quarter, as the still resilient consumer offsets the manufacturing recession, however it will be a sixth straight quarter of no-growth economic stagnation and near all the lead indicators, from the sub 50 PMIs to 5.25% interest rates, point to a modest recession around the corner.

“It feels like the calm in the eye of the economic storm before the buckling economy pulls inflation down and allows the Bank of England to cut interest rates.”

If UK GDP shrank in July-September, it would be the first quarterly decline in a year (unless older data is revised today!).

As this chart shows, the economy is thought to have grown by 0.3% in January-March, slowing to 0.2% in April-June, below the long-term trend growth.

A chart showing UK GDP up to Q2 2023

Michael Hewson, chief market analyst at CMC Markets UK, says:

Having got off to a better-than-expected start to 2023, the UK economy looks set to slow sharply in H2 [the second half of the year], given the combined pressures from higher rates as well as higher prices.

There’s been a lot of headlines about how inflation has been slowing in the last few months however it should also be noted that food prices are still rising at close to double digit levels so the squeeze on incomes is still happening albeit at a slower rate, even as the energy price cap has slowly fallen.

Introduction: UK GDP report may show shrinking economy

Good morning.

We’re about to learn how the UK economy performed over the summer, and it may show the country went in reverse last quarter.

At 7am, the Office for National Statistics will release its first estimate of UK GDP for July-September.

Economists predict the economy contracted slightly over the quarter, with GDP forecast to have fallen by 0.1%.

That would put the UK on the brink of a technical recession (two quarterly contractions in a row), as high interest rates and painful price rises hit the economy.

Previous data has shown the economy shrank in July, as wet weather and strikes hit the economy, before a modest recovery in August

The economy is expected to have stagnated in September (we’ll get a monthly breakdown at 7am too).

Earlier this week, analysis from Bloomberg Economics showed there was a 52% chance that the UK was currently in a mild recession.

They predict the economy would shrink in both July-September and October-December, as soaring interest rates and rising unemployment hit household spending.

Deutsche Bank’s chief UK economist, Sanjay Raja, says:

We see September GDP just about flatlining. Services activity, we think will end Q3 flat, with the construction sector contracting for a second consecutive month. Risks are skewed to a lower print too, with our nowcast showing a marginally negative distribution.

If our forecasts are broadly in line, Q3-23 GDP will likely shrink by 0.1% q-o-q. This is consistent with our quarterly nowcast indicators which point to falls in household consumption, business investment, and government consumption.

The agenda

  • 7am GMT: UK GDP report for July-September

  • 7am GMT: UK trade report for September

  • 12.30pm GMT: European Central Bank president Christine Lagarde speaks at Financial Times’ Global Boardroom 2023

  • 1pm GMT: Russian trade balance

  • 3pm GMT: University of Michigan’s index of US consumer confidence

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