Economy

UK economy rebounds from royal funeral hit but outlook remains bleak

Chancellor warns of ‘tough road ahead’ as Britain prepares for a bleak 2023

The UK economy rebounded more strongly than expected in October but the outlook remains grim. Photograph: Christopher Furlong/Getty Images

Mon Dec 12 2022 - 09:27

Britain’s economy rebounded in October a little more strongly than expected from September when output was affected by a one-off public holiday to mark the funeral of Queen Elizabeth, but a recession remains on the cards, official data showed on Monday.

Gross domestic product grew by 0.5 per cent after September’s 0.6 per cent contraction, the Office for National Statistics (ONS) said. A Reuters poll of economists had pointed to a 0.4 per cent bounce-back.

The figures are unlikely to change the view among investors and analysts that Britain’s economy faces a bleak 2023. British financial markets showed no reaction to the figures.

“Despite October’s growth, it would take a significant turnaround in policymaking and/or global conditions to change the downward British economic trajectory,” George Lagarias, chief economist at auditing firm Mazars, said.

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“Stretched household incomes could see sustained falls in consumer spending over the coming year,” said Yael Selfin, chief economist at KPMG UK. “The bounce-back in retail spending could be short-lived, which would mean another disappointing holiday season.”

Responding to the data, chancellor of the exchequer Jeremy Hunt said: “While today’s figures show some growth, I want to be honest that there is a tough road ahead.

“Like the rest of Europe, we are not immune from the aftershocks of Covid-19, Putin’s war and high global gas prices,” he added.

In the three months to October, Britain’s economy shrank by 0.3 per cent, a smaller fall than a median forecast for a 0.4 per cent contraction in the Reuters poll but the biggest drop since early 2021 when the country was under tight coronavirus restrictions.

The darkening outlook is expected to leave Bank of England policymakers deeply divided this week over how much to raise interest rates to fight inflation, which is at its highest level in 41 years. A half-point increase to 3.5 per cent is expected by investors.

The Bank of England said last month that Britain’s economy looked set for a two-year recession if interest rates rose as much as investors had been pricing. Even without further rate hikes, the economy would shrink in five of the six quarters until the end of 2023, it said.

“Tightening monetary policy too aggressively could risk worsening the financial outlook for firms and households, and extend the looming downturn,” said Suren Thiru, economics director at ICAEW, an accountancy trade body.

The ONS said the economy in October was 0.4 per cent larger than before the pandemic set in.

It said consumption of electricity and gas was the biggest drag on economic growth in October, which was the seventh-warmest on record, according to the Met Office. “The estimated drop may also indicate some changes in consumer behaviour in response to recent energy price rises,” the ONS said.

An increase in Covid-19 vaccinations in October added 0.1 percentage points to the monthly increase in GDP. – Reuters / Bloomberg

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