Yahoo Finance UK economy set to suffer deeper recession next year as interest rates rise faster
The scale of the recent woes hitting the UK economy are set to be revealed on Wednesday with the release of August’s gross domestic product (GDP) report.
According to a Bloomberg News survey, the British economy contracted by -0.2% in the three-months to August, after it came in flat in the quarter to July, which was already slower than expected.
A slowdown in hiring and business investment, rising inflation and interest rates, and a sharp cost of living crisis, has also meant that the UK economy is now expected to take until 2024 to recover to pre-COVID levels.
Deutsche Bank said this week that it expects August to have had a marginal increase after disappointing GDP data in July.
“We expect the trend of subpar growth to continue into the back end of the summer,” it said. “We see August GDP expanding by only 0.1% month-on-month.
“Driving the rise in output is a sustained pick up in services activity. We also expect construction activity to rise (0.4% month-on-month). But moving in reverse will likely be industrial production, with drops in manufacturing, oil, and energy weighing on growth.”
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The lender added that it expects growth in the third quarter to shrink by 0.2%, compared to the three months before, driven mainly by a weaker post-June bank holiday recovery as well as the September bank holiday.
However, it has forecast GDP to expand by 0.2% in the fourth quarter, largely reversing the Q2 loss. Altogether, this would leave 2022 GDP growth up 4.5%.
Beyond 2022, it anticipates a weaker 2023 thanks to the weaker macroeconomic backdrop and higher interest rates.
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Meanwhile, Fitch Ratings has also lowered its UK GDP forecast for next year since the publication of its latest global economic outlook in September, following extreme volatility in UK financial markets and the prospect of sharply higher interest rates.
It now expects the UK economy to decline by 1% in 2023 compared with -0.2% in the September forecast.
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It comes as UK government bonds and the pound (GBPUSD=X) sold off sharply following the chancellor’s mini-budget on 23 September in which he announced £45bn of unfunded tax cuts.
This was already on the back of a large-scale energy price subsidy, and caused sharp increases in government borrowing.
“The jump in real interest rates sparked dysfunction at the long end of the government bond market as defined-benefit pension funds faced margin calls on out-of-the money interest rate swap positions related to liability-driven investment strategies,” Fitch said.
The Bank of England (BoE) has since been forced to announce temporary interventions to buy long-dated gilts to prevent a “doom loop” of pension fund forced selling to raise collateral.
Fitch now expects much more rapid interest rate rises as the BoE seeks to offset the impact of looser fiscal policy, a weaker currency on inflation, and support investor confidence.
It has forecast hikes from 2.25% to 4.25% by December 2022 and a rate of 5.0% by 2Q23 (compared to our previous forecasts of 3.0% and 3.25%, respectively), slightly below market expectations.
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Prime minister Liz Truss told the Conservative party conference in Birmingham that the government would prioritise “growth, growth, growth” while attacking what she called an “anti-growth coalition” that could hold the country back.
She said she wanted to break a “high-tax, low-growth cycle” by offering lower taxes and scrapping regulations to encourage households to spend and companies to invest in the UK economy.
