UK economy stagnates as high borrowing costs hit activity

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The UK economy stagnated in the three months to September, according to official figures that highlight the challenge facing chancellor Jeremy Hunt as he seeks to revive growth in his upcoming Autumn Statement.

Gross domestic product was unchanged in the third quarter compared with the previous three months, data published by the Office for National Statistics showed on Friday.

Zero growth in the latest quarter was down from a 0.2 per cent expansion in the three months to June, suggesting that high borrowing costs are taking a toll on activity and the cost of living crunch is still hitting household spending.

The figure was slightly better than the 0.1 per cent contraction forecast by economists in a Reuters poll, but in line with the Bank of England’s expectations. The BoE has forecast that the economy will be flat in 2024.

Friday’s data eases concerns among many analysts that high interest rates are pushing the economy into recession, and suggests that the central bank may keep interest rates higher for longer as it seeks to return inflation to the 2 per cent target.

“The key point is that the economy is not weak enough to reduce core inflation and wage growth quickly,” said Paul Dales, economist at the consultancy Capital Economics. He forecast that the BoE would only be able to cut interest rates in late 2024, rather than in mid-2024 as widely expected.

Output rose 0.2 per cent month on month in September, the ONS data showed, stronger than analysts’ expectations of no change.

However, the figures showed that the economy continued to stagnate ahead of the Autumn Statement on November 22, in which Hunt will outline plans to boost economic growth.

Hunt said on Friday: “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.”

James Smith, research director at the Resolution Foundation think-tank, said the data showed Britain was a “stagnation nation” that had struggled to secure sustained economic growth since the 2008-09 financial crisis.

The figures also leave the UK towards the bottom of the league table of major economies relative to pre-pandemic levels. Compared with the final quarter of 2019, the UK economy has grown 1.8 per cent, well below the 7.4 per cent expansion of the US and the 2.9 per cent growth of the eurozone. The UK has outperformed Germany, however, and posted similar growth to France.

In a worrying sign for Hunt’s plans to boost investment, the ONS data showed capital spending fell 2 per cent in the third quarter. This was driven by a 4.2 per cent contraction in business investment, considered a key factor in boosting productivity growth and living standards.

Real household expenditure also registered a 0.4 per cent contraction, driving a 0.7 per cent drop in consumer-facing services output. The trend is consistent with spending being cut amid high cost pressures.

Overall, the services sector registered a 0.1 per cent fall in the three months to September, driven by a contraction in real estate, which reflects the impact of high interest rates on the property market.

Darren Morgan, ONS director of economic statistics, said the falls in many services sectors “were partially offset by growth in engineering, car sales and machinery leasing”.

“There were also small growths in manufacturing, led by cars and metal products, while construction grew due to new commercial property work.”