February 25, 2024

UK economy stabilizes as interest rates rise

  • Written by Nick Edser and Faisal Islam
  • BBC News

Image source, Getty Images

Figures showed that the British economy failed to grow between July and September, after a series of interest rate increases.

The advisor said that rising interest rates were affecting growth, but added that the economy's performance was better than expected this year.

Forecasters indicate that the economy is set to remain stagnant for several months yet.

Last week, the Bank of England said the UK was likely to see zero growth until 2025, although it was expected to avoid a recession.

As of September, the Bank of England had raised interest rates 14 times in a row in an attempt to curb rising prices.

However, while raising interest rates can reduce inflation — the pace at which prices rise — it also affects economic growth by making it more expensive for consumers and businesses to borrow money.

Interest rates are at a 15-year high of 5.25% and are expected to remain high for some time. Bank Governor Andrew Bailey said last week that it was “too early” to consider cutting interest rates.

Paul Dales, chief UK economist at Capital Economics, said the latest data suggested that “the impact from higher interest rates is increasing”, but he did not expect the bank to start cutting interest rates until late next year.

The Office for National Statistics (ONS) said the latest growth figures showed a weak picture across all sectors of the economy.

“It is natural that interest rates will have an impact, and the Treasury's view is that the main reason behind the slowdown in growth is that,” Treasury Secretary Jeremy Hunt told the BBC.

“What may be surprising to a lot of people is that the economy is much stronger than people thought,” he said.

“Most people thought it would shrink this year. It has actually grown, and that gives us an excellent foundation for the future.”

Asked whether he was looking to cut taxes in the Autumn Statement on November 22, Hunt said he wanted to reduce the tax burden, but business tax cuts would take priority over personal taxes. “I have always been clear that low taxes are part of a dynamic, successful and entrepreneurial economy, but what I have said is that my priority is growth, so lowering business taxes is the most important thing at this stage,” he said.

Labour's shadow chancellor, Rachel Reeves, said the latest figures were “further evidence that the economy is not working”, while Liberal Democrat Treasury spokeswoman Sarah Olney said the Conservatives had “dealt a fatal blow to our economy which has led us down a path of not working”. the growth”.

Although higher interest rates by the bank are slowing growth, the government may take little comfort from the reduced risk of a formal technical recession – defined as two consecutive three-month periods of economic contraction.

Growth forecasts for the last three months of the year range between 0% and 0.1%, in line with those of other major European countries, which are also affected by rising interest rates.

The Bank of England may feel it is engineering a soft landing after last year's hyperinflation.

The government will also point to a potentially significant drop next week in headline inflation, with the figure expected to slow from 6.7% to around 4.8% for October.

It may declare victory on that target on Wednesday, even as the growth target is now in question.

This could change the backdrop to the Autumn Statement later this month and, if it holds, it will change the backdrop to the general election too as it challenges Downing Street's apparent desire to paint a picture of “transformation”.

As the inflation problem declines, the growth problem may become more prominent.

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Customers have less money to spend, says Dominic Boone of Fizz Creations

Dominic Bone, finance director of gifts company Fizz Creations in Lancing, West Sussex, says it has been a particularly difficult year.

The company is entering the key Christmas period in which it makes most of its money, and Boone has noticed a decline in consumer confidence.

“People are struggling with interest rates on their mortgages, their cars, their costs of living, their heat, their gas, their electricity. Everything costs more – they have less money in their pockets.”

Down the road is Lucy Lago, who runs her own café inside Lancing Business Park. “I see that people have definitely stopped eating breakfast, and obviously their spending per head has gone down a little bit. People have become very careful about what they buy,” she says.

GDP figures show the health of the British economy. It is a measure of – or an attempt to measure – all the activities of companies, governments and individuals in a country.

If the number is increasing, it means the economy is growing and people are doing more work and usually becoming a little richer, on average. But if GDP declines, the economy shrinks, which can be bad news for businesses.

Darren Morgan, from the Office for National Statistics, told the BBC's Today programme, that while the latest data showed a “very flat picture” overall, there were signs of improvement.

“For example, more than half of companies were not considering raising their prices in November 2023 – this is the highest proportion of companies telling us this since we first asked this question in April 2022,” he said.

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