UK Economic Growth Stalls Amidst Impact of Elevated Interest Rates

UK Economic Growth Stalls Amidst Impact of Elevated Interest Rates

UK (Parliament Politic Magazine) – The UK economy showed no growth between July and September, according to recent data, following a series of interest rate hikes. The chancellor acknowledged that the higher rates were impacting growth but noted that the economy had outperformed expectations for the year. Projections indicate a prolonged period of stagnation in the coming months.

Last week, the Bank of England stated that the UK was likely to experience zero growth until 2025, though a recession is anticipated to be avoided. Up until September, the Bank of England had implemented 14 consecutive interest rate increases to address escalating inflation. 

UK Economy Stagnates Amid Successive Interest Rate Rises

While such rate hikes can mitigate inflation, they also hinder economic growth by increasing the cost of borrowing for consumers and businesses. With interest rates currently at a 15-year high of 5.25%, they are anticipated to remain elevated for an extended period. Bank governor Andrew Bailey emphasized that it is “much too early” to consider rate cuts.

Paul Dales, Capital Economics’ chief economist for the UK, commented that the most recent data indicates an increasing impact from elevated interest rates. However, he anticipates that the Bank will not commence rate cuts until the latter part of the coming year.

The Office for National Statistics (ONS) reported that the latest growth figures depict a subdued scenario across all sectors of the economy. The services sector experienced a slight decline over the three-month period, while manufacturing and the construction sector showed marginal growth.

Chancellor Jeremy Hunt, in an interview with the BBC, acknowledged the impact of interest rates on the economy. He stated, “Naturally, interest rates do have an impact, and the Treasury’s assessment is that the primary reason for the slowdown in growth is due to that.” Hunt expressed surprise that the economy performed better than anticipated, contrary to expectations of contraction.

Outlook from Chief Economist: Higher Interest Rates Impacting Growth

When questioned about potential tax reductions in the upcoming Autumn Statement on November 22, Hunt expressed the intention to decrease the tax burden. However, he emphasized that prioritizing business tax cuts over personal taxes is essential, stating,

 “I’ve always been clear that low taxes are part of a dynamic, successful, entrepreneurial economy, but what I’ve said is my priority is growth, so cutting business taxes is the most important thing at this stage.”

While the Bank’s rate increases are dampening economic growth, there is a slight alleviation for the government as the risk of entering a formal technical recession, defined as two consecutive three-month periods of economic contraction, has diminished.

Prime Minister Rishi Sunak’s commitment to “grow the economy” hangs in the balance, given the minute contraction in the economy between July and September, though officially recorded as 0.0%.

The growth projection for the last quarter of the year hovers between 0% and 0.1%, aligning with other major European countries grappling with the impact of escalating interest rates.

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Government’s Perspective: Economy Stronger Than Expected Despite Slowdown

The Bank of England may perceive its efforts as initiating a relatively gentle descent from last year’s elevated inflation levels. The government might highlight the anticipated significant decrease in the headline inflation rate next week, expected to drop from 6.7% to around 4.8% for October, possibly claiming success on this front even as the growth target faces scrutiny.

This evolving scenario could reshape the narrative for the upcoming Autumn Statement and, if sustained, could influence the landscape for the general election. It poses a challenge to Downing Street’s inclination to present a narrative of a decisive “turnaround.”

Dominic Boon, the finance director of Fizz Creations, a gift supplier located in Lancing, West Sussex, describes this year as particularly challenging. As the company enters the crucial Christmas season, traditionally its most lucrative period, Boon observes a decline in consumer confidence.

Boon notes that people are grappling with the impact of elevated interest rates on mortgages and car loans, along with the rising costs of living and essential utilities like heating, gas, and electricity. The overall result is diminished disposable income for consumers, affecting their purchasing power.

Gross Domestic Product (GDP) serves as a barometer for the health of the UK economy, encompassing the activities of companies, governments, and individuals within the country. An increasing GDP indicates economic growth, signifying increased productivity and, generally, improved financial well-being for the populace. 

Beth Malcolm

Beth Malcolm is Scottish based Journalist at Heriot-Watt University studying French and British Sign Language. She is originally from the north west of England but is living in Edinburgh to complete her studies.