(Bloomberg) — Britain’s economy narrowly returned to growth in November but fell short of expectations as the UK struggles to shake off concerns that the country is in the grip of stagflation.
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Gross domestic product increased 0.1% following a 0.1% contraction in both September and October, the Office for National Statistics said. That was below forecasts for 0.2% growth. It means the economy is still smaller than it was in June, the month before Labour came to power.
The figures will reinforce fears that the UK is stuck in a stagflationary trap of rising prices and flat-lining growth, despite a welcome slowdown in inflation in December. The economy has now grown just twice in the five months since Labour took office.
The pound fell following the data and was trading at $1.2221, down 0.2% on the day. Market bets on rate cuts from the Bank of England were unchanged with investors pricing in two quarter-point reductions this year.
The UK’s economic momentum slowed sharply after Prime Minister Keir Starmer took office, having matched the best in the Group of Seven in the first half. The economy will stagnate for a second straight quarter unless GDP grows by more than 0.07% in December, the ONS said. Last month, the BOE downgraded its forecast for the fourth quarter to zero growth.
Chancellor of the Exchequer Rachel Reeves has been under pressure for the past week after a global bond market selloff drove benchmark government yields to a 17-year high and threatened to derail her economic agenda.
November was the month following the budget, when Reeves announced £40 billion ($48.9 billion) of tax rises to repair public services. In a statement after Thursday’s figures, she blamed the tepid growth on the former Conservative administration and said she is “determined to go further and faster to kickstart economic growth.” The chancellor wants to boost investment in the UK and has urged regulators to do more to prioritize growth. Business Secretary Jonathan Reynolds told Sky News said he was “not satisfied” with the economy’s performance.
Services, the largest sector in the UK economy, grew by just 0.1% in November and construction output rebounded by 0.4%. Those sectors offset a 0.4% drop in industrial production output. GDP showed no growth over the three months through November.
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“Services grew a little, with wholesaling, pubs & restaurants and IT companies all doing well, partially offset by falls in accountancy and business rental & leasing,” said ONS Director of Economic Statistics Liz McKeown. “Construction also grew, led by new commercial developments, while production continued to decline in November with further falls across a range of manufacturing industries and oil and gas extraction companies.”
What Bloomberg Economics Says…
“The mild rebound in November’s GDP leaves the economy on course to stagnate in the final quarter of 2024, though the weaker-than-expected print means it wouldn’t take much to tip it into a contraction. With the latest inflation figures undershooting expectations, we think that strengthens the case for the Bank of England to ease policy in February. We expect it to stick to gradual cuts through the course of the year, lowering rates by 100 basis points in total.”
—Ana Andrade and Dan Hanson, economists. Click to read the REACT on the Terminal
Luke Bartholomew, deputy chief economist at abrdn, said the figures were “another disappointing report.”
“While not yet consistent with a recession there is not enough here to dispel concerns about the outlook especially ahead of the upcoming increase in national insurance,” he said, referring to a £26 billion increase in employer payroll taxes that takes effect in April.
Higher borrowing costs had at one point erased Reeves’ budget headroom and left her at risk of breaking her fiscal rules. Wednesday’s inflation undershoot reversed some of that and restored a bit of her headroom but the lackluster growth reading will not have helped and Reeves remains under scrutiny.
The Institute for Public Policy Research, a left leaning think tank that is close to the Labour government, blamed the BOE. Rates are “too high,” Pranesh Narayanan, an IPPR economist, said. “It’s clear that interest rates have become a drag on growth. The Bank of England must act soon to bring them down or is putting our prosperity at risk for no good reason.”
BOE rate-setter Alan Taylor warned on Wednesday of the risk that officials leave policy restrictive for too long, threatening a hard landing for the UK economy. Ahead of the central bank’s next meeting on Feb. 6, he called for pre-emptive rate cuts given the darkening economic outlook.
–With assistance from Harumi Ichikura, Mark Evans, Joel Rinneby and Ellen Milligan.
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