The United Kingdom's economy contracted in the third quarter, reinforcing market bets on an impending interest rate cut by the Bank of England.
On Friday, the Office for National Statistics (ONS) reported that the UK's Gross Domestic Product (GDP) for the third quarter shrank by 0.1% quarter-on-quarter, falling short of both the initial estimate and market expectations, which had predicted no change. This contraction follows a revision of the second quarter's GDP growth from an initial estimate of 0.2% to 0%.
A recession is typically defined as two consecutive quarters of economic contraction. Concerns have been mounting over the UK's sluggish economic growth, but the country has narrowly avoided a recession so far. Whether the UK can stave off a recession will become clearer when data for the October to December quarter is released in February. The Office for Budget Responsibility (OBR) has forecasted a growth rate of 0.1% for the last three months of the year.
According to the ONS report, rising interest rates have pressured consumer spending, which slowed during the period. It's estimated that households' real disposable income significantly declined, growing only by 0.4% from July to September, compared to a 2.3% increase in the previous three months. Ashley Webb, a UK economist at Capital Economics, commented:
"The revised data might indicate that a mild and shallow recession began in the third quarter. Regardless of a 'mild recession,' economists generally expect economic growth to remain subdued throughout 2024."
Meanwhile, UK inflation cooled more than expected, with data earlier this week showing that November's inflation rate slowed significantly to a two-year low of 3.9%, down from 4.6% in October.
These figures could increase pressure on the Bank of England to pivot towards cutting interest rates sooner as economic momentum weakens. Market expectations for the Bank of England to initiate rate cuts as early as May are growing, with traders anticipating a total of 143 basis points in cuts next year.
