UK economy grows in November, but recession still seen as inevitable

According to new data from the Office for National Statistics, U.K. GDP grew 0.1% in November, defying economists’ expectations and reducing the likelihood that Britain entered a technical recession in the fourth quarter. This is good news for the UK economy, which has been struggling in recent months.

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A recent poll of economists by Reuters showed that they expected the British economy to contract by 0.2%. This is in line with the overall bleak picture for the economy.
The third quarter of 2022 saw a 0.3% contraction, but after a 0.5% expansion in monthly real GDP in October and the surprise 0.1% growth in November, it appears that a technical recession has been averted for now.

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According to the ONS report released on Friday, output in consumer-facing services grew by 0.4% in November 2022. This followed growth of 1.5% in October 2022 (revised up from a growth of 1.2% in the previous publication). The largest contribution to growth came from food and beverage service activities in a month when the FIFA World Cup started.

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The increase in services seemed to offset some of the negative impact of the mass strike action across the U.K., particularly in the rail and postal sectors.
The ONS stated that while the direct impact of the strikes by postal and rail workers can be seen in the rail transport and postal and courier activities industries, it is not possible to isolate the impact of these strikes from other factors across the wider economy.

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However, there was evidence to suggest that this industrial action had an impact across a wide range of industries, for example wholesale trade and manufacture and repair of jewellery. Despite the positive monthly surprise, the ONS noted that GDP shrank by 0.3% in the three months to the end of November. However, economists said the recession may simply be delayed rather than averted.

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"The data from today makes it clear that we are likely in for a recession, even if it is a relatively shallow one," said Jeremy Batstone-Carr, European strategist at Raymond James.

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The Bank's monetary tightening is still having an impact on the economy, and this is likely to continue as the corporation tax increase to 25% takes effect and the tax reduction on new investments expires. This is likely to lead to further economic contraction. The Bank of England has predicted that the UK economy will experience a recession lasting for at least four quarters - the longest on record.

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Stuart Cole, head macro economist at Equiti Capital, told CNBC via email Friday that production fell by 0.2%, suggesting that Q4 growth may be modest. Cole added that the outlook for the coming year is difficult, as services consumption is expected to be curtailed by the cost of living crisis. The Bank of England's forecast of a recession looks set to be delayed rather than avoided, with the spending boost from the World Cup and Christmas now behind us, and industrial action spreading. Significant tax rises are due to hit consumer pay packets in April, which will further delay the onset of a recession.

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The central bank's monetary policy is expected to remain tight in the short term as inflation remains high. In November, inflation was at its highest level in 41 years, though it did decline slightly from October.

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The cost of living crisis caused by soaring food and energy prices, widening industrial action and unprecedented pressure on the country’s health service is not likely to end anytime soon. This will likely have a negative impact on consumer spending power and activity. Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, said that policymakers are keen to see heat taken out of the economy in order to bring inflation down and eventually end the continuous rise in interest rates.

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It's encouraging to see the U.K. economy grow by half a percent, but there are still some very real challenges to overcome.