UK economy stagnates in 2023, but may avoid a technical recession


At the end of 2023 UK GDP growth was revised down for Q2 2023 from 0.2% to zero, and for Q3 from zero to minus 0.1%. Early estimates also show GDP growth fell by 0.3% in October. However, the latest S&P Global UK services PMI business activity index rose to 53.4 in December, up from 50.9 in November which suggests the economy may have picked up in the final month of the year.

Other data suggests households may be in a better position than before and are spending more. ONS data shows that household’s real disposable income grew in Q3 by 0.4%, following growth of 2.3% in the previous quarter. This was driven by increased wages in the private sector (although it was partly offset by increased taxes) and falling inflation. Bank of England data shows that unsecured borrowing (including credit cards) increased to £2.0 billion in November from £1.4 billion in October and the highest since March 2017 (£2.1 billion). This could be one reason for the 1.3% growth in retail sales in November – although sales volumes still fell by 0.8% in the three months to November 2023 compared with the previous three months.

A recent article from the Bank of England explores how households are adjusting to rising mortgage costs. It suggests that on average mortgagors have seen repayments increase by around £100 a month, and have cut their monthly spending by around £50 as a result. For those yet to experience a rate rise, households are also cutting spending by £28 a month in anticipation. This shows that the impact of Bank Rate rises on reducing spending is faster than the speed of the increase in mortgage costs.

CPI inflation increased by 3.9% in the 12 months to November, down from 4.6% in October. Core CPI (excluding the more volatile items of energy, food, alcohol and tobacco) also fell to 5.1% in November, down from 5.7% in October. This drop in inflation saw market interest rates fall, which has in turn has seen rates on fixed rate mortgages fall. Markets are now expecting Bank Rate to fall be around 3.8% in a year, down from 4.5% a month ago (see IOS chart at end).

In August to October the unemployment rate was largely unchanged according to experimental estimates (due to increased uncertainty around the Labour Force Survey) from the ONS. Annual regular pay growth (excluding bonuses) remained strong at 7.3%, but was down from 7.8% in the previous three month period. Regular Pay growth for the public sector was 6.9%, one of the highest rates since comparable records began in 2001.

Strong wage growth and steady unemployment suggest labour market conditions remain tight. However in September to November the number of job vacancies fell for the 17th consecutive period – the longest ever consecutive run of falls on record, but they still remain above pre pandemic levels. Whilst the official number of unemployed people has been unavailable in recent periods (due to LFS issues) it is likely the eagerly watched vacancies to unemployment ratio should be falling, and in time see wage growth