UK economy rebounds in November

UK economy rebounds in November; posing further confusion for investors expecting looser monetary policy by Daniela Hathorn

 
“UK GDP saw a growth of 0.3% in November, coming in slightly higher than the expected 0.2%. The upbeat economic data seems to be causing more confusion than providing clarity.

In the last quarter of 2023, the market mentality around monetary policy has shifted noticeably as central banks started to acknowledge that their policies had become sufficiently restrictive and were working effectively to reduce inflation. But the latest data across the US, UK and Eurozone has thrown a spanner in the works of the dovish hopefuls.

This is not uncommon – after all, we know that economies hardly ever follow a straight line – but traders seem to be slightly unsure as to how to position themselves going forward.

Consumer prices have risen in December in both the euro area and the US, highlighting the non-linearity of the disinflation process. We’ll have to wait to get the latest CPI reading in the UK, but so far data suggests expectations are for the downward trend in consumer prices to continue in the UK. If so, the markets could start to price in higher chances of a rate cut in March from the BoE, which could weigh on the pound as it worsens its carry trade potential. Regardless, markets will likely be cautious until further insight from BoE speakers can be obtained.”
 
Daniela Hathornis Senior Market Analyst at Capital.com

 
Rob Morgan, Chief Investment Analyst at Charles Stanley, comments: “
 
UK to avoid recession?
 
The UK’s stuttering economy expanded by 0.3% in November 2023, slightly beating expectations as it rebounded from a weak October. This narrows the odds of a technical recession, defined as two consecutive quarters of negative GDP growth, though if it does escape this fate, it will only do so by a wafer-thin margin.
 
Teetering on the edge
 
Revised data showed that GDP contracted by 0.1% for the third quarter of 2023, while the fourth quarter got off to a bad start in October as output declined by 0.3% month-on-month. Today’s November’s figure shows the economy starting to regain momentum towards the end of the year, driven overwhelmingly by a rebound in the services sector.

Provided December’s figure is positive, which is a realistic expectation, the UK will have teetered on the edge of recession without falling in. However, much will depend on activity around the festive period, and it may be that Black Friday discounting brought forward more Christmas spending than usual.
 
More economic stagnation for the UK
 
The UK economy is likely to continue to broadly flatline as lower inflation is offset by the squeeze on consumer demand and business spending from the lagged impact of previous interest rate hikes.

While interest rates have peaked, the full impact of previous increases is yet to be felt by some households and businesses that secured debt in a much lower rate environment. Monetary policy has therefore had a lagged effect on the economy as fixed rate mortgages and loans run to their terms. We are now seeing earlier turnings of the interest rate screw showing up more clearly in economic data.
 
What does it mean for interest rates?
 
Inflation should continue to slow in 2024 with a deceleration in food prices helping bring it closer to the Bank of England’s 2% target by the autumn. The Bank will also be conscious of evidence the economy is under pressure, with hesitant consumer spending, a sluggish housing market and a weaker outlook for jobs all set to dampen the demand side of the equation. Combined with the febrile growth data, it means the Bank is done with hiking interest rates and will start to consider cuts as the year progresses.