Double-blow to hit the UK over coming months
The UK economy has continued its impressive resilience in the aftermath of conflict in the Middle East – growing by 0.7% between July and September of this year compared to the three months prior.
However, that resilience will be severely tested over the coming months by rising inflation and interest rates, the Resolution Foundation said on Thursday (12 November).
Strong quarterly growth was largely due to surprisingly fast monthly growth in the summer, but that momentum appears to have continued into September, with monthly growth of 0.2%. Recent growth was driven by services, particularly in business-facing sectors like administrative and support services and ICT.
The latest data continues a decent run for the UK, in which GDP per person has risen by a cumulative 2.7 per cent over the past two years (since Q3 2024). However, income growth has been far less impressive, with real household disposable income (RHDI) per person essentially flat over that same period.
“The UK’s strong economic performance has continued into the second half of the year, which is all the more impressive given the ongoing disruption caused by conflict in the Middle East. But with inflation and interest rates both forecast to rise towards 5 per cent, this resilience will be severely tested in the coming months,” said Simon Pittaway (Senior Economist at the Resolution Foundation).
“Stepping back, the good news is that the UK looks to be breaking free of its reputation as a stagnation nation. The less positive news is that stronger economic growth is yet to translate into big living standards gains.”
The question of energy
This was largely echoed by Kit Rees (Investment Strategist at Quilter), who noted that question now is how long that resilience can last.
Rees noted that the UK has continued to grow despite a decidedly unhelpful backdrop, but there is a danger the headline number flatters an economy that is beginning to lose momentum underneath.
That said, growth for September itself was a little hotter than expected with growth coming in at 0.2%, although August was revised down to no growth, she said.
“But while growth remains robust, if unspectacular by historic standards, higher employment costs and rising energy prices are hitting at the same time as cost-of-living pressures weigh down on demand.
“This is expected to be the case for the rest of this year and into next, unless the geopolitical situation somehow transforms into a more positive backdrop. That is likely to weigh on the economy into next year.”
While the rhetoric has been dialled back of late and energy prices have fallen, the war in the Middle East has had enough of an impact that it continues to hamper future activity, she said.
“With inflation persistently high and the Bank of England raising interest rates in a bid to get it under control, the outlook for the coming months is not great. The Bank of England is therefore in an unenviable position. The economy continues to show resilience but there are fears it will lose momentum just as energy-driven inflation is keeping pressure on interest rates.
“A de-escalation in the Middle East would help considerably, but until then the Bank has little room for manoeuvre and thus further rises will be expected.”
