14th November 2023
UK economy gains 0.2%, exceeding zero growth predictions
Last week, after figures revealed the UK economy was flat in the third quarter, UK equities ended on a low.
In an attempt to lower inflation, the Bank of England has sharply raised interest rates throughout most of 2022 and 2023, although there’s been a recent hiatus on these hikes. Because borrowing has become more expensive for consumers and businesses, these rising rates have contributed to a slowdown in the already fragile economy by lowering spending and perhaps even investment.
Even though the UK economy is doing poorly overall, the details revealed some better news. September’s numbers showed that the month’s economic activity had increased. Although a 0.2% gain wouldn’t often be cause for celebration, analysts had predicted no growth for the month.
Hetal Mehta, Head of Economic Research at St James’s Place, noted:
“The UK economy showed zero growth in the third quarter due to overall weak domestic demand, although this was offset by a bump in net exports. September saw a modest monthly increase, but consumer-facing service industries are clearly facing ongoing challenges.”
Reduced consumer spending leaves many hoping for rate cut
Consumer spending suffered during the quarter, falling 0.4%, adjusted for inflation, as consumers tightened their wallets. Due to the negative impact of rising interest rates and ongoing high inflation on disposable income, consumers mostly reduced their consumption of goods rather than services.
However, those hoping for a rate cut were probably disappointed when the Governor of the Bank of England, Andrew Bailey, commented:
“It’s really too early to be talking about cutting rates…we are very clear, we are not talking about that.”
“The Bank of England noted that we’re only halfway through the impact of its interest rate increases, suggesting a prolonged period of weak growth ahead.”
Senior European Economist and Schroders Strategist Azad Zangana called the most recent numbers “slightly better than economists had expected”, but not by enough to alter the outlook for monetary policy. He added:
“The Bank of England has warned that interest rates are likely to remain elevated for a prolonged period of time, as inflation has proven to be higher and stickier than expected. The economy is expected to contract in the final quarter of the year, potentially going into a shallow technical recession in early 2024.”
Eyes turn to Jeremy Hunt’s autumn statement
As a result of the challenging economic climate, people are cutting down on their spending, so all eyes will be focused on Jeremy Hunt when he makes his Autumn Statement next week. Though we won’t know for sure until the Budget is released, indications from the government thus far don’t point to any significant giveaways.
It’s also important to keep in mind that, from an investment perspective, the majority of the FTSE 100’s revenue comes from sources outside of the UK. As a result, even in the event that the British economy continues to face difficulties, many of these businesses can continue to grow.
Gains for international equities, including S&P 500 and Nikkei 225
In the eurozone, the MSCI Europe excl. UK Index had a small increase of 0.2%. Christine Lagarde, the president of the European Central Bank (ECB), issued a warning not to anticipate a decrease in interest rates over the coming few months despite this increase. She said: “Long enough has to be long enough.”
Equity markets outside of Europe last week were largely positive. Both the Nasdaq and the S&P 500 saw increases in the US, the former by 2.4% and the latter by 1.3%. A number of strong earnings reports from businesses in the technology sector supported the rise in US equities.
In Japan, the announcement of further government stimulus to combat inflation and robust company earnings contributed to the Japanese Nikkei 225’s 1.9% rise this week. The stimulus package, which is estimated to be worth $113 billion, contains new subsidies to help reduce utility bills, along with tax cuts. In China, despite ongoing property concerns, Chinese shares ended the week on a good note, with the Shanghai Composite increasing by 0.3%.