News & analysis

The UK economy grew by 0.3% in November, beating the 0.2% expansion anticipated by markets to completely reverse October’s decline. That said, a contraction in the three-month estimates was also notable, suggesting that it is not all sun and rainbows for the UK economy.

Indeed, despite the pickup in activity for November, the economy is yet to return to the size it was in June. Even so, today’s better-than-expected outturn significantly reduces the risk that the UK economy will fall into recession in Q4 when December’s figures are released next month, though the odds of this remain a toss-up in our view. The broad trend however points to the UK economy essentially flatlining in 2023, which we suspect is likely to be the bottom for economic performance. Heading into 2024, we expect to see a pick up in growth, as rising real wages support consumer demand and a recovery in economic activity as a result.

For currency markets, this morning’s print left sterling largely unchanged, with both FX traders and the Bank of England likely focused on the inflation and jobs data set to land next week.

Heading into today’s release, we felt confident that a pickup in growth was on the cards. Significantly, the 1.3% growth in retail sales in November and a rise in the composite PMI reading to above the 50 no-change mark both suggested that the UK economy had returned to expansion. This was confirmed both by headline figures and the details of the release, where it was perhaps unsurprising to see that November’s expansion was led by growth in services given the lopsided nature of the UK economy. Services grew by 0.4% November, more than reversing a drop off the month prior, though this was also upgraded to show just a -0.1% contraction in the services sector for October. That said, a pickup in production will also have helped boost headline growth figures at the margin, with activity showing MoM gains of 0.3%. The story here is less positive however, given a significant downgrade to the October print, which now suggests that the sector shrank by 1.3% that month.

Zooming out, it is clear that the UK economy stagnated in 2023, even as today’s data actually shows that the economy is marginally smaller now than it was last January.

Whether or not the UK economy will avoid a technical recession in 2023, however, remains an open question. If the December reading were to print exactly in line with today’s figures, this would see QoQ growth total to -0.045%, just enough to avoid a contraction when rounded to one decimal place, as is common practice. Given this, it would require only a fractional expansion in the next round of figures to see the economy flatline in Q4. In our view, it is a close call on whether the UK economy can achieve that based on leading indicators. On the one hand, PMI readings rose once again in December, which should in isolation point to further growth. On the other hand, BRC like-for-like sales data released earlier this week undershot expectations, suggesting that consumer spending will be softer than expected when official figures are released, with a resumption of doctors strikes also weighing on output in the healthcare sector.

Technical definitions of recession aside, however, the economy flatlined last year either way. In particular, fractions of a percentage point of growth are unlikely to shift the narrative for policymakers at the Bank of England at the policy meeting in February.

Looking forwards though, we think there is more scope for optimism, and expect to see an improvement in growth for 2024. Most importantly, real wages are now growing in the UK, and much of the impulse from tighter monetary policy should now have passed through to the real economy. All told, this should translate into improving consumer demand and therefore economic activity in 2024. Given that we expect the eurozone in particular to struggle in the early part of the year, the UK’s relatively better economic outlook should see some sterling upside against the euro play out over coming months, despite the soft end to 2023 and limited market reaction to this morning’s data.



Nick Rees, FX Market Analyst


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