Weak UK growth figures raise the risk of recession

But one-off factors behind the headline message should allow the BoE to still raise interest rates at its next meeting

By Stuart Cole | @Stuart Cole | 13 September 2023


Today’s UK GDP figures provided something of a wake-up call to the market, as they showed that growth fell by -0.5% in July, comfortably exceeding the -0.2% figure expected and wiping out the entirety of June’s 0.5% gain. The 3-mth growth rate remained unchanged at 0.2%. The numbers have stoked concerns that the long-feared recession that has been stalking the UK economy for the best part of a year is finally at risk of being realised. And after yesterday’s labour market statistics, which on balance pointed to the BoE raising interest rates again at next week’s meeting, today’s numbers could see it pause for thought as the impact of the monetary tightening delivered so far is clearly starting to exert a significant drag on activity.

However, there are some key factors behind today’s figures that should allow the BoE to look through the headline message and conclude that a further rise in interest rates is still warranted. Much of the weakness reported today is attributable to one-off factors, such as the weather and industrial action. The wetter and cooler weather experienced in July, in stark contrast to the unusually warm conditions experienced in June, saw consumers opt to stay at home rather than venture out to shopping malls and leisure/hospitality venues, leaving services level activity broadly flat over both months, despite the -0.4% falls recorded in both the distribution and food & accommodation services sectors. In a similar vein, July was a particularly heavy month for strike action in the education and public health sectors, with more days lost than was the case in June. Going forward, with the teaching unions having accepted the government’s offer a 6.5% pay rise, so no more industrial action can be expected from education workers; while junior doctors, who are still holding out for a higher settlement, are unlikely to repeat the 5 days of strike action seen in July as it represents a significant cut to their monthly pay.

More concerning is the drop reported in manufacturing activity, which fell -0.8% on the month and is largely colouring in the picture already sketched out by various surveys such as the PMI data. However, manufacturing activity accounts for only around 10% of UK GDP and therefore the impact a slowdown here will have on the UK’s overall growth figure is somewhat marginal and unlikely to be enough to tip the economy into recession on its own.

Accordingly, there are sufficient reasons to suggest that the downbeat picture painted this morning will not necessarily be repeated going forward, leaving the BoE free to tighten monetary policy further next week if it deems a further rise in interest rates is needed. But of course, it is the CPI figures that will ultimately dictate the BoE’s actions, and unless we get an unexpected soft print next week, our expectation is that we remain on course for another 25bps interest rate rise this month.