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Rishi Sunak was quick to declare victory in November when he met his goal of presiding over a halving of inflation. But the prime minister had less room for rejoicing over one of the other pledges he set out at the start of the year: his vow to grow the economy.
The story of 2023 has instead been one of near-stagnation — a lost year which was confirmed last week as the Office for National Statistics reported a 0.3 per cent drop in gross domestic product between September and October.
That left output no higher than in January. Activity is forecast to remain tepid next year with high borrowing costs and the legacy of the worst inflationary upsurge in a generation weighing on the economy.
“The country’s economic prospects remain quite bleak, frankly — we are treading water,” said Jagjit Chadha, director of the National Institute of Economic and Social Research. “Given the UK’s low productivity, I suspect growth will be imperceptible for the rest of the decade.”
The retreat in headline inflation to 4.6 per cent is now easing some of the pressure on household finances, but the economy has yet to show much vigour. Output in many industries, including IT, financial services, transportation, retail and real estate was lower in October than at the start of the year.
Construction, manufacturing and hospitality managed to produce more in October than at the start of the year, but their performance has still trended downward in the latest months. Health and education were the sectors that compensated for the fall in the rest of the economy since January.
What’s more, the volume of total UK exports was down 6.8 per cent in the three months to September compared with the last quarter of 2022, driven by a sharp contraction in goods exports.
“The UK economy has been battling against a cocktail of headwinds from the cost of living crisis, rising interest rates, volatile energy prices, Brexit, the fallout from Covid, a low productivity problem and a long-term shortage of investment,” said Victoria Scholar, at the investment platform Interactive Investor.
Households were still facing double-digit rates of food price growth at 10.1 per cent as of October. Adjusted for inflation, wages are only 1.3 per cent above January’s levels and still below their levels for most of 2022. In October, consumers were buying less than last year even if they were spending more money, particularly on food.
Meanwhile, tenants are struggling with the fastest rental growth since records began in 2016, while the average mortgage rate is at the highest since 2009. More households face higher borrowing costs as their fixed-term deals expire. Mortgage arrears have already started rising and business insolvencies are at the highest level since 2009.
The financial pressures have taken a toll on households’ morale and spending. Reported life satisfaction, happiness and feeling that life is worthwhile have all declined this year, and they are well below their pre-pandemic levels, according to the Office for National Statistics.
The UK is by no means the only country performing weakly. The German economy was no bigger in the three months to September than in the last quarter of 2022, with similar outcomes for Italy, France and the eurozone. However, the UK compares poorly with the US where output grew 2.4 per cent over the same period.
The lost year for growth is likely to extend into 2024, according to the Bank of England which in November foresaw no expansion at all next year. Economists polled by Consensus Economics have revised down their UK growth expectations for next year to 0.3 per cent, down from a 0.8 per cent forecast in May.
That said, the slowdown in inflation suggests reasons to expect that the cost of living crisis will ease. Some issues that have kept the UK economy in stagnation “are now clearly dissipating,” said Tomasz Wieladek, chief European economist at investment company T Rowe Price.
Crucially, households’ inflation expectations have fallen. “This means . . . cost of living considerations are now less of a drag in consumer confidence and private consumption,” he explained.
UK price growth slowed to 4.6 per cent in October from its October 2022 peak of 11.1 per cent. It is expected to have declined further to 4.4 per cent in November when the data is published on Wednesday.
This means the BoE doesn’t need to generate a deep recession to bring inflation back to its 2 per cent target. “A year ago, that looked like a distinct possibility,” said Paul Dales, economist at Capital Economics.
Easing inflation means wages have started to rise faster than price growth since June, boosting spending power. It also means that. with rate cuts expected for next year, some popular mortgage rates are coming down from their summer peak. After hovering at historically low levels for most of 2023, consumer confidence has finally started to improve — and so has business morale.
Business investment rebounded in 2023 and was up 3.7 per cent in the three months to September compared with the last quarter of 2022, helped by a generous tax break that became permanent in the Autumn Statement. That followed a long period of stagnation, however, meaning business investment is still only about 4.9 per cent above what it was in Q2 2016, when the UK voted to leave the EU.
While 2023 has been tepid at best, some forecasters had expected it to be considerably worse. Bank of England predictions in 2022 that the country was facing a “prolonged” recession were not borne out — pointing to welcome signs of resilience.
“It’s a miracle the economy didn’t contract given the double whammy [it] faced this year from the cost of living crisis associated with high inflation and the fastest and largest rise in interest rates since the late 1980s,” said Dales.
Against that backdrop, he argued, a stagnant economy can be described as a “score-draw rather than a loss”.