The British economy's recent data indicates a potential downturn, with GDP shrinking by 0.1% in the past quarter and the possibility of a recession looming. The UK's dominant service sector saw a 0.2% decrease in production, partially offsetting growth in construction and manufacturing sectors. With inflation persisting at 3.9%, analysts worry about the impact of rising interest rates on household finances and consumer spending.
Economists at Capital Economics reckon that this trend might have signaled the onset of the mildest recession in the third quarter. Further interest rate hikes may put more pressure on household budgets, impacting consumer spending in the fourth quarter of 2023 and the first quarter of 2024.
In the UK, the rate of consumer price inflation slowed down slightly to 3.9% in November, a figure still well above the Bank of England's 2% target. Meanwhile, the US and Eurozone saw inflation rates of 3.1% and 2.4% respectively. Despite this high inflation rate, soaring housing prices have somewhat lessened the immediate effects on many households' disposable incomes.
According to Hargreaves Lansdown chief equity analyst Sophie Lund-Yates, the economic downturn raises the likelihood of an official recession in the new year. The Office for Budget Responsibility (OBR) expects the UK GDP growth to rise by a modest 0.7% in the next year, a significant decrease from the originally forecasted 1.8% and looking unlikely to improve much in 2023.
These dismal growth prospects come as the OBR cites low real wage growth, repercussions of previous interest rate hikes, and diminishing fiscal support as the main reasons behind this pessimistic outlook. Notably, the OBR suggests that the Bank of England's decision to tighten monetary policy slowly began affecting the economy only recently, with a considerable portion of earlier rate hikes' impact yet to materialize.
Drawing from data from UK Finance, around 1.6 million fixed-rate mortgages are expected to mature in 2024. This mortgage maturity brings about uncertainties for homeowners, as they will need to navigate a potentially higher interest rate environment to refinance or secure new loans.
