Economic Slowdown and Interest Rate Impact
In the third quarter of 2023, Britain’s economy displayed no growth, marking its most sluggish performance in a year. This stagnation is primarily attributed to a decline in the real estate sector, which has been adversely affected by elevated interest rates. The Office for National Statistics (ONS) reported a 0.1% decrease in the broader services sector, a significant component of the UK economy, during the July-to-September period.
This period of zero growth contrasts with a 0.2% increase in the gross domestic product observed in the second quarter. Analysts suggest that the series of 14 interest rate hikes by the Bank of England, starting from late 2021, are significantly restraining economic activities.
The real estate sector, which represents 13% of the UK’s economic output and is highly sensitive to borrowing costs, experienced a 0.4% drop in activity in the latest quarter. Halifax, a major mortgage lender, reported a 3.2% decrease in the average residential property price in October 2023 compared to the same month in the previous year.
Paul Dales, the chief UK economist at Capital Economics, interprets the GDP data as an indication of the growing impact of higher interest rates. He suggests that while it may be a matter of semantics to declare the economy in recession, it is likely to remain subdued for some time.
The Bank of England’s forecast anticipates a 0.5% increase in GDP for the year and virtually no growth in 2024. Additionally, recent ONS figures on productivity, which assess the efficiency of labor and capital utilization in the economy, reveal minimal improvement in UK productivity since 2007. Enhanced productivity is essential for elevating living standards over time.
James Smith, research director at the Resolution Foundation, a think tank, describes Britain as a “stagnation nation” struggling to achieve sustained economic growth since the financial crisis. UK finance minister Jeremy Hunt is expected to present the government’s strategy for stimulating economic growth later this month.