(Bloomberg) -- The UK economy is heading for a rocky final quarter of 2023 after a string of indicators this week prompted the Bank of England to halt its quickest monetary tightening in three decades.
Recession warnings are flashing, with a survey of purchasing managers pointing toward a contraction and potential jump in unemployment. The result prompted a quick shift in the policy debate away from fighting inflation and toward the risks buffeting the economy.
While this week’s data showed that the threat from inflation is in retreat, there were several concerns about a protracted downturn are rising up the agenda, complicating Prime Minister Rishi Sunak’s task of rallying Conservative Party members at its annual conference in little over a week in Manchester.
Here’s how the week unfolded:
The loudest alarm sounded on Friday with S&P Global’s purchasing managers’ index slipping deeper into contraction territory in September. The research firm also warned that companies were shedding staff at the quickest pace since the pandemic and the global financial crisis more than a decade ago.
The BOE’s rate-setters were given an early sneak-peak of the gloomy data and pointed to it in their decision to call off another rate increase that was widely expected until last week. Central bank officials now expect gross domestic product to rise just 0.1% in the third quarter, down from the 0.4% growth they forecast just seven weeks ago.
“The economy is entering more troubled waters, and a (relatively mild and short-lived) recession is likely to ensue this winter,” said Sandra Horsfield, economist at Investec.
Inflation is falling more sharply than the BOE had anticipated, data released on Wednesday showed. The Consumer Prices Index eased to 6.7% in August, well below the 7% or more the BOE and economists had anticipated.
While that’s still triple the 2% target set by the Treasury, Governor Andrew Bailey said he expects a further significant drop when figures for October are published in November.
Bailey warned there’s “no room for complacency” on inflation, leaving the door open to restarting rate hikes. But the sense is that the UK has turned the corner on the worst bout of price increases in the Group of Seven nations.
That suggests the BOE’s bitter medicine of 14 back-to-back rate rises is beginning to work, as price pressures and the jobs market come off the boil, giving policy makers time to wait to see if inflation eases as quickly as they expect.
Retail sales data on Friday showed a 0.4% gain in August, making up for part of the ground lost in July, when wet weather kept shoppers out of stores. As a result, retailers will contribute a net drag on third-quarter GDP, unless September’s reading shows an increase of 1.4% or more.
Alex Kerr, economist at Capital Economics, warned that August’s growth was “not as good as it looks” and expects consumer spending to decline in the coming quarters.
While wages are finally rising faster than inflation, easing the tightest cost-of-living squeeze in generations, that may not be enough to overcome broader headwinds putting a chill on household budgets.
The value of retail sales in August was 17% above pre-pandemic levels in February 2020, while the volume of those sales 1.5% below — leaving people paying more to buy fewer goods.
For now, consumer confidence is improving. GfK’s measure of sentiment rose to its highest level in almost 2 years in September. However, Kerr cautioned that sentiment will likely be knocked back again by “the growing drag from higher interest rates.”
There’s little prospect of fiscal support from Sunak’s government to prop up the economy during a tricky period, despite the continued outperformance of public finances data.
Borrowing figures on Thursday showed that the Treasury’s deficit is running below the Office for Budget Responsibility’s forecasts so far in the current fiscal year. However, public debt is at its highest level as a share of the economy since the early 1960s, interest costs are still elevated, and any economic downturn would threaten tax receipts.
Chancellor of the Exchequer Jeremy Hunt poured cold water on the prospect of tax cuts, which members of the ruling Conservative Party want before the election. He said on Thursday that tax cuts are “virtually impossible” because of the challenging economic and fiscal backdrop.
Britain’s property market is slowly deflating after a jump in mortgage rates strained the affordability of loans for home buyers.
Official data on Wednesday showed that average house prices were down slightly on November’s peak in July. Readings from mortgage lenders indicate the UK is about half way through a 10% slump most economists are expecting.
That in itself could add to the chill winds buffeting the UK economy, making homeowners feel less wealthy and forcing those who are trying to get a rung on the property ladder to save more.
--With assistance from Eamon Akil Farhat and Andrew Atkinson.
©2023 Bloomberg L.P.