The fact that the UK economy did not contract in the last quarter will temporarily dampen some of the debate about a recession. Our best guess right now is that we will return to very modest growth in the fourth quarter, although this is partly due to base effects after that weakness in July. Instead, the discussion about a possible recession should focus more on what is happening in the labor market. There has been a clear cooling in hiring demand, although problems with unemployment figures make it difficult to say to what extent this has translated into higher unemployment. We expect layoffs to gradually increase as the impact of higher rates continues to squeeze companies’ margins.
Higher mortgage rates will also be a drag on activity. With around 4-5% of mortgage holders refinancing each quarter, many of whom are coming from a 5-year fixed deal with rates starting at 1 or 2, the average payment will continue to rise, even though the Bank of England tightening is over. We expect the average rate of outstanding mortgage debt to rise from just over 3% today to just under 4% by the end of 2024. That said, we must remember that only about a quarter of households have a mortgage these days , and this pain will be partly offset by positive real wage growth in the coming quarters. In summary, we think the most likely path for the economy is stagnation or very modest growth next year, although a recession cannot be ruled out.
These latest GDP figures have limited implications for the Bank of England, and the committee’s attention will focus more on next week’s services inflation and wage growth figures. Both are still too high for the Bank’s liking, but barring any big upside surprises in both sets of figures, we believe the next move in the bank rate will be downwards with cuts starting next summer.