UK economy still facing threat of recession despite better growth number for November

The UK managed to post growth of 0.3% in November, slightly stronger than the expected 0.2% reading and largely offsetting the -0.3% contraction recorded for October. However, it leaves the economy hovering on the brink of recording a technical recession, an event that will be confirmed if December’s growth report is negative, something that is looking likely given that the month was disrupted by wet weather constraining consumer spending and which saw further industrial action from doctors. Given this, avoiding a recession looks far from assured, especially given that today’s report contained downward revisions to recent growth estimates that lowered the 3mth-on-3mth growth rate in November from 0.0% to -0.2%, matching the reading seen in October: although the economy recorded some momentum in November, the overall outlook remains gloomy. Accordingly, the best that can probably be hoped for in December is a reading of zero growth, although even here growth over Q4 as a whole would still have fallen by -0.05%. As such, it may only be rounding that prevents a recession from being declared.

This recession risk very much chimes with warnings given by the Bank of England a few months ago, when it assigned a 50% probability to the risk of a recession being seen. However, even if such an outcome is realised, any recession looks set to be shallow only, and short lived, with growth generally expected to gain momentum over 2024 as falling CPI boosts both real wages and household disposable incomes, and planned tax and benefit changes, alongside expected cuts in interest rates, inject more spending power into the economy. Further, with the household savings rate already having recovered to above its pre-covid level, any increase in household incomes is likely to see spending increased, something that will go a long way towards offsetting an expected drop in gross fixed capital formation resulting from the Bank of England's (BoE) imposed tighter lending conditions and a more sluggish export environment.

But these positives will take some time to materialise, leaving the economy continuing to tread a tight line between contraction and stagnation over Q1, a picture that very much illustrates how precarious the outlook for growth is, and particularly so given that the worst of the winter weather is yet to be faced. And with around half the impact of the BoE's monetary tightening generally considered yet to be felt, any meaningful recovery in economic activity may not be seen until interest rates start to be cut, something that the BoE has so far avoided raising any expectations of. With the forthcoming March Budget expected to include meaningful tax cuts as the government prepares to fight a general election sometime over the next year, any easing in monetary policy is not expected to be seen until at least H2. Accordingly, even if the UK manages to avoid a recession in December, it is by no means out of the woods yet.