Economists: UK still at risk of technical recession.
Several economists are warning that the UK could have slid into a technical recession at the end of last year, even though the economy grew by 0.3% in November.
Britian would be in a technical recession if growth contracted in October-December for the second quarter running.
A technical recession would be a blow to the government ahead of the next election, even though the ONS are arguing that two small drops in quarterly GDP are not a full-blown downturn, as covered earlier.
Yael Selfin, chief economist at KPMG UK, says strike action in December will have hit GDP at the end of last year:
“The economic outlook currently remains gloomy, with a technical recession still potentially on the cards in the second half of 2023, especially given the expected impact from the industrial action in December.
Nonetheless, even if the economy manages to avoid a recession, it is expected to remain in stagnation territory.
Richard Carter, head of fixed interest research at Quilter Cheviot, says the UK remains on the brink of recession, as high interest rates hit growth:
“The UK economy grew by a modestly positive 0.3% month-on-month in November, up from the unexpected 0.3% contraction seen in October. This uplift in November is just enough to bring the UK economy back to flat growth over these two months, but it leaves an awful lot of pressure on the December figures as even a slight downward turn would result in the UK entering a technical recession after Q3 GDP was revised down to a fall of 0.1% at the end of last year.
“This morning’s figure shows just how precarious the situation is for the UK economy and piles yet more pressure onto the Bank of England to cut interest rates. The Bank has managed not to tip the UK into a recession to date, but it is looking increasingly likely that its luck may be coming to an end.
Suren Thiru, economics director at ICAEW, says the case for cutting UK interest rates soon is growing, as the economy struggles to gain momentum.
“November’s rebound may have been insufficient to prevent a small technical recession at the end of 2023, with the cost-of-living squeeze and high borrowing costs likely to have constrained output in December.
“The UK is facing a notably difficult 2024 with the lagged impact of previous interest rate rises, weaker consumer demand and moderately higher unemployment likely to stifle economic activity, despite a boost from lower inflation.
“This lacklustre GDP outturn means that interest rates will remain on hold next month. With the UK teetering on the brink of recession and inflation slowing, the case for loosening policy sooner rather than later is growing.”
Neil Birrell, chief investment officer at Premier Miton Investors, agrees that the economy may have contracted in Q4.
“The UK economy returned to growth in November, although this may not prevent the fourth quarter of 2023 being another one of contraction.
Whether the economy slides into a mild recession or not is unlikely to matter too much, but there is not much momentum moving into 2024.
However, given the inflation and interest rate pressures, this is a creditable performance and with rate cuts in the pipeline and an election looming, there is some stimulus on the way.”
Key events
Oil could keep rising if tensions escalate further in the Middle East, warns Ricardo Evangelista, senior analyst at ActivTrades:
Evangelista explains:
Brent oil prices rose more than 3% over the last 24 hours as the markets reacted to an attack by British and American forces on Houthi targets in Yemen. The strikes came as a response to the militants’ attacks on transport ships crossing the Strait of Hormuz in the Red Sea, which they claim to be a legitimate form to pressurise Israel to halt operations in Gaza.
This attack is another escalation in the tensions that have been simmering in the Middle East since the October 7 Hamas attack, and the markets are reacting with apprehension. The Red Sea route, which leads to the Suez Canal, is crossed by the main shipping lanes between Asia and the West and is the main export route for Gulf oil.
With one of the most critical oil supply channels to the West under threat, it is not surprising to see crude prices rising in a dynamic that could create further upside for the price of the barrel should tensions continue to escalate in the Middle East.
Such an outcome would worry central bankers, as it would undermine efforts to bring down inflation to levels where interest rates can safely be cut….
Oil up as Middle East tensions increase
Oil is trading at its highest level in two weeks this morning, following the US and UK attacks on Houthi military targets in Yemen.
Brent crude, the industry benchmark, has jumped by 2.3% so far today to around $79.30 per barrel, its highest level since 28 December.
Oil had surged over $90 per barrel in the aftermath of the 7 October attacks. It then slipped towards the end of last year on forecasts of weak economic growth in 2024, meaning less demand for energy
Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, says:
Brent crude has risen more than 2% to over $79 a barrel, as geopolitical tensions increase in the Middle East. Iran has captured an oil tanker off the coast of Oman in response to sanctions, according to reports.
Air strikes on Houthi targets in Yemen have also increased anxiety.
As flagged earlier (see here), Tesla is suspending most car production at its factory near Berlin for two weeks, due to delays to component shipments caused by attacks on vessels in the Red Sea.
Those tensions have prompted shipping firms to take the longer route around Africa, leading to delays.
Fusion Risk Management director of Third Party Risk Management Wes Loeffler warns that other firms will encounter similar problems, saying:
Organisations that have not established redundancies within their supply chains are likely to encounter delays, disruptions, or difficulties in procuring essential components that are necessary for delivering goods and services.
Mohamed El-Erian, president of Queens’ College, Cambridge and chief economic adviser at the financial giant Allianz, has also warned the UK “might have slipped into a slight technical recession in the second half of 2023”.
Powered by the services sector and also retail, the #UK economy grew by 0.3% in November.
This is better than the consensus forecast of 0.2%, reverses the 0.3% GDP fall in October, but doesn’t yet exclude the possibility that the #economy might have slipped into a slight…— Mohamed A. El-Erian (@elerianm) January 12, 2024
BBC: Red Sea attacks could shrink economy, warns Treasury
The BBC are reporting that the UK government is concerned that ongoing attacks on shipping in the Red Sea could cause the economy to shrink.
They say:
The BBC understands the Treasury has modelled scenarios including crude oil prices rising by more than $10 a barrel and a 25% increase in natural gas.
The government fears if the disruption to cargo traffic spreads to tanker traffic then another energy shock is possible.
Here’s the BBC’s Faisal Islam:
The impact from Red Sea cargo trade rerouting has been disruptive but not crisis-inducing… if the disruption spreads to Gulf/ Straits of Hormuz tankers (of oil AND gas) then that could well prompt a more serious spike in energy prices/ renewed & prolonged inflation shock…
— Faisal Islam (@faisalislam) January 12, 2024
Europe and the world is now more dependent on especially Qatari exports of Liquefied Natural Gas, because the Russian pipelines have been switched off – they all come through the Straits of Hormuz
— Faisal Islam (@faisalislam) January 12, 2024
As flagged earlier, the Brent crude oil price has jumped around 2% this morning, to $79 per barrel.
That’s a two-week high, but still lower than the highs over $120/barrel seen after Russia’s invasion of Ukraine in spring 2022.
Goldman Sachs has lowered its forecast for Britain’s 2024 economic growth forecast to 0.5% from an earlier expectation of 0.6%, Reuters reports.
Goldman trim their 2024 UK GDP growth forecast to 0.5% from 0.6% prior – sell-side consensus sits at 0.3%, BoE f’cast stagnation, OBR at 0.7%
— Michael Brown (@MrMBrown) January 12, 2024
The Unite union warns that today’s GDP report shows the country is “teetering on the brink after a decade of economic mismanagement”, and needs “intensive care”.
Unite general secretary Sharon Graham said:
“Today’s figures only confirm what workers see and hear every single day. Our economy needs intensive care as the result of low investment, crumbling infrastructure and a cost-of-living crisis which makes daily life unaffordable.
“This is a result of choices made by our politicians over many years. It’s time we invested to improve the economy for the benefit of all”.
Here’s George Dibb, head of the centre for economic justice at IPPR, on the problems in the UK economy:
There’ll be a lot of talk of 0.3% growth in November but fundamentally this isn’t a thriving economy. Some months we’re up, some we’re down, but really we’re just bouncing around 0% growth
The UK is a low investment, low growth economy – we need that to change pic.twitter.com/uKE6zCfEvQ
— George Dibb (@GeorgeDibb) January 12, 2024
Today’s “growth” figures are that tiny uptick on the right hand side
The bigger story here is that the economy has been running on a flat-tyre since the pandemic pic.twitter.com/eEHis3UZSq
— George Dibb (@GeorgeDibb) January 12, 2024
Blunt metaphor for the economy alert:
Most of our economic growth in the construction sector is coming from repairing things that are broken pic.twitter.com/gRC9D2BFri
— George Dibb (@GeorgeDibb) January 12, 2024
Getting back to GDP… today’s data shows how construction of new building has slowed in recent months.
New work decreased by 3.6% in the three months to November, including a 6.9% drop in activity in private new housebuilding.
That highlights the slowdown in housebuilding last year – with Persimmon reporting a 33% drop in completions earlier this week.
But, repair and maintenance rose by 3.8% in September-November.
So overall, monthly construction output is estimated to have fallen by 0.6% in the three months to November compared with the three months to August.
In November alone, new work fell by 2.0%, while repair and maintenance increased by 2.1%.
The construction sector fell by 0.2% in Nov 2023. 3 out of 9 of the construction sectors saw a fall in output. The main contributors; New Housing & Infrastructure continue to be “rained off”, dragging monthly construction output down 3.9% & 2.0%, respectively. @ONS pic.twitter.com/eaYialR48j
— Emma Fildes (@emmafildes) January 12, 2024
Burberry shares tumble after warning over profits.
Over in the City, shares in luxury goods maker Burberry tumbled by 10% at the start of trading, after it warned that demand was slowing.
Burberry told shareholders this morning that adjusted operating profit for the financial year to 30 March 2024 will be below its previous guidance.
Profits are now expected to be between £410m to £460m, as “the slowdown in luxury demand is having an impact on current trading”.
Back in November, Burberry said they would be at the lower end of the consensus forecast range of £552mn to £668mn.
Jonathan Akeroyd, Burberry’s chief executive officer, told shareholders:
“We are continuing to deliver the transition to our new modern British luxury creative expression for Burberry which started appearing in our stores in early Autumn.
We are still in the early stages of executing on this, which has become more challenging against the backdrop of slowing luxury demand. We experienced a further deceleration in our key December trading period and we now expect our full year results to be below our previous guidanc
The UK continued its “economic hokey cokey in November”, says Nicholas Hyett, investment analyst at Wealth Club, with 0.3% growth in GDP following the 0.3% fall in October.
Hyett adds:
With weakness in travel and hospitality, there is evidence that the cost of living crisis continues to squeeze consumers. But, high tech service industries seem to be picking up the slack, and even manufacturing is showing some signs of life, with its first positive growth since June 2023. It’s an economic muddle, albeit with some promising signs.
Resolution Foundation: Stronger than expected growth in November gives a fighting chance of avoiding recession
Britain’s stronger than expected growth in November gives “a fighting chance” of avoiding recession, says the Resolution Foundation.
James Smith, research director at the Resolution Foundation, explains:
“The economy grew more strongly than expected between October and November, driven by a recovery in our services sector including strong black Friday retail sales and a high performing ICT sector, making it less likely that Britain will fall into recession.
“The final verdict on 2023 will come next month, but it is essential that Britain builds some economic momentum in 2024.”
Economists: UK still at risk of technical recession.
Several economists are warning that the UK could have slid into a technical recession at the end of last year, even though the economy grew by 0.3% in November.
Britian would be in a technical recession if growth contracted in October-December for the second quarter running.
A technical recession would be a blow to the government ahead of the next election, even though the ONS are arguing that two small drops in quarterly GDP are not a full-blown downturn, as covered earlier.
Yael Selfin, chief economist at KPMG UK, says strike action in December will have hit GDP at the end of last year:
“The economic outlook currently remains gloomy, with a technical recession still potentially on the cards in the second half of 2023, especially given the expected impact from the industrial action in December.
Nonetheless, even if the economy manages to avoid a recession, it is expected to remain in stagnation territory.
Richard Carter, head of fixed interest research at Quilter Cheviot, says the UK remains on the brink of recession, as high interest rates hit growth:
“The UK economy grew by a modestly positive 0.3% month-on-month in November, up from the unexpected 0.3% contraction seen in October. This uplift in November is just enough to bring the UK economy back to flat growth over these two months, but it leaves an awful lot of pressure on the December figures as even a slight downward turn would result in the UK entering a technical recession after Q3 GDP was revised down to a fall of 0.1% at the end of last year.
“This morning’s figure shows just how precarious the situation is for the UK economy and piles yet more pressure onto the Bank of England to cut interest rates. The Bank has managed not to tip the UK into a recession to date, but it is looking increasingly likely that its luck may be coming to an end.
Suren Thiru, economics director at ICAEW, says the case for cutting UK interest rates soon is growing, as the economy struggles to gain momentum.
“November’s rebound may have been insufficient to prevent a small technical recession at the end of 2023, with the cost-of-living squeeze and high borrowing costs likely to have constrained output in December.
“The UK is facing a notably difficult 2024 with the lagged impact of previous interest rate rises, weaker consumer demand and moderately higher unemployment likely to stifle economic activity, despite a boost from lower inflation.
“This lacklustre GDP outturn means that interest rates will remain on hold next month. With the UK teetering on the brink of recession and inflation slowing, the case for loosening policy sooner rather than later is growing.”
Neil Birrell, chief investment officer at Premier Miton Investors, agrees that the economy may have contracted in Q4.
“The UK economy returned to growth in November, although this may not prevent the fourth quarter of 2023 being another one of contraction.
Whether the economy slides into a mild recession or not is unlikely to matter too much, but there is not much momentum moving into 2024.
However, given the inflation and interest rate pressures, this is a creditable performance and with rate cuts in the pipeline and an election looming, there is some stimulus on the way.”
Rachel Reeves MP, Labour’s Shadow Chancellor, has responded to the latest GDP figures, saying:
“The Conservatives have presided over 14 years of economic failure that has left working people worse off.
A decade of low economic growth has left Britain with the highest tax burden in 70 years, with families set to be £1,200 a year worse off under the Tories’ tax plans.
It’s time for change. Rishi Sunak should call an election and give the people the chance to vote for a Labour government that will get Britain’s future back.”
UK GDP: the key charts
These charts from the ONS show how the economy fared up to November:
Hunt welcome rise in November GDP
Chancellor of the Exchequer Jeremy Hunt has welcomed the news that the UK economy returned to growth in November.
Hunt points out that efforts to slow inflation (such as high interest rates) weighed on the economy, saying:
“While growth in November is welcome news, it will be slower as we bring inflation back to its 2% target.
But we have seen that advanced economies with lower taxes have grown more rapidly, so our tax cuts for businesses and workers put the UK in a strong position for growth into the future.”
ONS chief economist on recession risks
Q: What needs to happen for the UK to avoid shrinking in the fourth quarter of 2023, putting the economy into recession?
ONS chief economist Grant Fitzner says “everyone is obsessed” whether the Q4 GDP reading is slightly positive or slightly negative.
That data is due in a month’s time, when we also discover how the economy fared in December.
The UK would be in a ‘technical recession’ if Q4 GDP was negative, given Q3 GDP fell by 0.1%.
Fitzner, though, explains that an actual recession is more serious than just two small falls in quarterly GDP in a row [although this is a widely-held definition].
He told Radio 4’s Today Programme:
It’s important to remember that a recession is not simply a very small negative number followed by another very small negative number. It’s a significant and sustained fall in output.
We don’t expect to see that.
If December’s GDP is flat or positive, and there are no revisions to previous months, the UK might avoid a negative quarter in Q4, Fitzner adds.
