British Economy Slows On Lackluster Services, Budget Jitters

BY Benzinga | ECONOMIC | 11/15/24 12:10 PM EST

The British economy expanded less than forecast in the third quarter as the service sector and budget concerns slowed momentum.

Gross domestic product (GDP) grew by 0.1% for the quarter, compared with growth of 0.5% in Q2, data from the Office for National Statistics (ONS) showed on Friday. That compared with economists' expectations of 0.3% for Q3.

"The economy grew a little in the latest quarter overall as the recent slowdown in growth continued," Liz McKeown, Director of Economic Statistics at ONS, said. "Generally, growth was subdued across most industries in the latest quarter."

The services sector, which accounts for 79% of the UK's GDP, rose only 0.1%, weighing on the UK GDP as technical activities and wholesale and retail trade showed marginal improvements. Business-facing services saw no growth.

<figcaption class="wp-element-caption">Source: ONS</figcaption></figure>

British Economy Hurt By Manufacturing Contraction

The British economy contracted by 0.1% in September month-on-month, missing forecasts of a 0.1% expansion. Services on a monthly basis showed "no growth," McKeown said, adding that "production fell overall, driven by manufacturing," with a contraction of 1%.

The weak data underlines the challenges that the Labour Party faces as it tries to revive economic growth. Industrial production contracted by 0.5% in September, missing forecasts of 0.2% growth month-on-month.

The British pound fell to the lowest level against the dollar since early July, extending a five-day decline to $1.2629. The pound has been weighed down by fears of trade escalation and poor relations with the US under President-elect Donald Trump.

British Foreign Secretary David Lammy has described Trump as "deluded, dishonest, xenophobic, narcissistic" and a "neo-Nazi-sympathizing sociopath."

Slow British Economy Growth Brings Rate Cut On Table

The latest UK GDP figures have shifted the focus on the Bank of England's (BoE) monetary policy trajectory. The BoE lowered interest rates on November 6 by 0.25 percentage points to 4.75%, the second cut this year.

"We shouldn’t overthink the GDP numbers we've been getting recently," ING said. "The Bank of England has made it abundantly clear that it's not putting much weight on them. Barring any downside surprises, we think the next move in December is a pause, before another rate cut in February.”

Most economists broadly expect a hold on December 19, when the Monetary Policy Committee meets next. But some argue that the UK GDP data make a solid case for a rate cut.

The data "are likely to open the door" to cuts before year's end, Wealth Club investment manager, Isaac Stell, said. If growth slows again, there is a "good chance" of cuts, University of Liverpool Management School Professor, Costas Milas, said.

Labour Faces Challenges Spurring British Economy

Chancellor Rachel Reeves has made improving GDP at "the heart of everything." The budget "tackled" public finances and greater public investment "in our plan for economic growth," Reeves said on November 14.

The fiscal plan will provide "economic stability" by putting "our public finances back on a firm footing," she said. "Instability in our public finances leads to instability in our financial markets. That is not good for investment."

The government increased taxes by ?40 billion to repair public finances and improve public services. It earmarked ?22.6 billion for the National Health Service and a 1.2% increase in employers' national insurance contributions.

Conservative MP Robert Jenrick called the tax increase "the biggest heist in modern history." Conservative leader Kemi Badench questioned why Labour's strategy always focused on "higher taxes, more borrowing, and lower growth."

<figcaption class="wp-element-caption">Source: Office for Budget Responsibility </figcaption></figure>

British Economy Faces ?Big Risks' in Budget

Reeves has argued that the tax hikes, aimed at the wealthiest, are necessary to sustain investments in healthcare, education, and infrastructure. However, the director of the Institute for Fiscal Studies (IFS), Paul Johnson, warned of "big risks lurking" in the budget.

"Big increases in taxes and borrowing are not costless," he wrote on October 31. "Not all of the extra borrowing, by any means, was for investment spending."

The Office for Budget Responsibility (OBR) cautioned on October 30 that rising government debt levels could put upward pressure on inflation. Having fallen back to around the 2% target in mid-2024, "we expect CPI inflation to pick up to 2.6% in 2025 partly due to the direct and indirect impact of Budget measures," it said.

The British Chambers of Commerce (BCC) has warned of further employment costs and how much businesses could absorb. This could weaken GDP growth, which the OBR projects at 1.1% for 2024 and 2% for 2025.

<figcaption class="wp-element-caption">Source: OBR</figcaption></figure>

"We need urgent action to drive growth, tackle the skills crisis, boost workforce health and reduce inactivity in the labor market," the BCC said on November 12.

Public Spending Alone Won't Spur British Economy

The government plans to spend ?975 million over the next five years to create "thousands" of jobs in the aerospace industry. The extension will speed up innovation, create job opportunities and support an industry, the government said.

Deputy chief economist Luke Bartholomew at abrdn believes the budget will expand the UK government's spending by ?70bn over the next five years. This will lead to higher inflation and growth next year, he said.

For BoE governor Andrew Bailey, government spending won't be enough to spur growth, especially as borrowing costs remain elevated. The average annual potential growth rate fell to 0.7% between 2020-2023, down from 1.3% between 2009-2019 and 2.6% between 1990-2008.

<figcaption class="wp-element-caption">Total managed expenditure of the government of the United Kingdom from 2000/01 to 2029/30, Source: Statista</figcaption></figure>

Business investment in the UK has been particularly weak by G7 standards," he said in a speech on November 14. "We need to encourage business investment in the UK," he said.

"Public investment is important as a foundation," he said. "But, to those who have pointed out that this will not raise the potential growth rate substantially, my response is ?of course not.'"

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