Rishi Sunak was fast to declare victory in November when he met his objective of presiding over a halving of inflation. However the prime minister had much less room for rejoicing over one of many different pledges he set out at first of the 12 months: his vow to develop the economic system.
The story of 2023 has as an alternative been one among near-stagnation — a misplaced 12 months which was confirmed final week because the Workplace for Nationwide Statistics reported a 0.3 per cent drop in gross home product between September and October.
That left output no larger than in January. Exercise is forecast to stay tepid subsequent 12 months with excessive borrowing prices and the legacy of the worst inflationary upsurge in a era weighing on the economic system.
“The nation’s financial prospects stay fairly bleak, frankly — we’re treading water,” mentioned Jagjit Chadha, director of the Nationwide Institute of Financial and Social Analysis. “Given the UK’s low productiveness, I believe progress shall be imperceptible for the remainder of the last decade.”
The retreat in headline inflation to 4.6 per cent is now easing a few of the stress on family funds, however the economic system has but to indicate a lot vigour. Output in lots of industries, together with IT, monetary companies, transportation, retail and actual property was decrease in October than at first of the 12 months.
Building, manufacturing and hospitality managed to provide extra in October than at first of the 12 months, however their efficiency has nonetheless trended downward within the newest months. Well being and training had been the sectors that compensated for the autumn in the remainder of the economic system since January.
What’s extra, the amount of complete UK exports was down 6.8 per cent within the three months to September in contrast with the final quarter of 2022, pushed by a pointy contraction in items exports.
“The UK economic system has been battling in opposition to a cocktail of headwinds from the price of residing disaster, rising rates of interest, unstable power costs, Brexit, the fallout from Covid, a low productiveness downside and a long-term scarcity of funding,” mentioned Victoria Scholar, on the funding platform Interactive Investor.
Households had been nonetheless going through double-digit charges of meals worth progress at 10.1 per cent as of October. Adjusted for inflation, wages are just one.3 per cent above January’s ranges and nonetheless beneath their ranges for many of 2022. In October, customers had been shopping for lower than final 12 months even when they had been spending extra money, significantly on meals.
In the meantime, tenants are battling the quickest rental progress since data started in 2016, whereas the typical mortgage fee is on the highest since 2009. Extra households face larger borrowing prices as their fixed-term offers expire. Mortgage arrears have already began rising and enterprise insolvencies are on the highest degree since 2009.
The monetary pressures have taken a toll on households’ morale and spending. Reported life satisfaction, happiness and feeling that life is worth it have all declined this 12 months, and they’re nicely beneath their pre-pandemic ranges, in accordance with the Workplace for Nationwide Statistics.
The UK is on no account the one nation performing weakly. The German economic system was no larger within the three months to September than within the final quarter of 2022, with related outcomes for Italy, France and the eurozone. Nonetheless, the UK compares poorly with the US the place output grew 2.4 per cent over the identical interval.
The misplaced 12 months for progress is prone to lengthen into 2024, in accordance with the Financial institution of England which in November foresaw no enlargement in any respect subsequent 12 months. Economists polled by Consensus Economics have revised down their UK progress expectations for subsequent 12 months to 0.3 per cent, down from a 0.8 per cent forecast in Could.
That mentioned, the slowdown in inflation suggests causes to count on that the price of residing disaster will ease. Some points which have saved the UK economic system in stagnation “at the moment are clearly dissipating,” mentioned Tomasz Wieladek, chief European economist at funding firm T Rowe Worth.
Crucially, households’ inflation expectations have fallen. “This implies . . . value of residing concerns at the moment are much less of a drag in shopper confidence and personal consumption,” he defined.
UK worth progress slowed to 4.6 per cent in October from its October 2022 peak of 11.1 per cent. It’s anticipated to have declined additional to 4.4 per cent in November when the information is printed on Wednesday.
This implies the BoE doesn’t have to generate a deep recession to convey inflation again to its 2 per cent goal. “A 12 months in the past, that seemed like a definite chance,” mentioned Paul Dales, economist at Capital Economics.
Easing inflation means wages have began to rise quicker than worth progress since June, boosting spending energy. It additionally signifies that. with fee cuts anticipated for subsequent 12 months, some fashionable mortgage charges are coming down from their summer season peak. After hovering at traditionally low ranges for many of 2023, shopper confidence has lastly began to enhance — and so has business morale.
Enterprise funding rebounded in 2023 and was up 3.7 per cent within the three months to September in contrast with the final quarter of 2022, helped by a beneficiant tax break that turned everlasting within the Autumn Assertion. That adopted an extended interval of stagnation, nonetheless, which means enterprise funding continues to be solely about 4.9 per cent above what it was in Q2 2016, when the UK voted to depart the EU.
Whereas 2023 has been tepid at finest, some forecasters had anticipated it to be significantly worse. Financial institution of England predictions in 2022 that the nation was going through a “extended” recession weren’t borne out — pointing to welcome indicators of resilience.
“It’s a miracle the economic system didn’t contract given the double whammy [it] confronted this 12 months from the price of residing disaster related to excessive inflation and the quickest and largest rise in rates of interest for the reason that late Eighties,” mentioned Dales.
In opposition to that backdrop, he argued, a stagnant economic system will be described as a “score-draw somewhat than a loss”.