September smacked the UK economy with a surprising shock as Gross Domestic Product (GDP) decreased by 0.1% from August’s month value. This drop paralleled the 0.1% decrease that occurred in August. This surprise plunge comes at a time when forecasters had already been predicting no growth at all for the month. Yet the latest figures released by the federal statistical authority are alarming. The UK is facing some long-term headwinds which have the potential to profoundly change the UK’s economic path.
UK GDP only increased by 0.1% in the third quarter as compared to the previous quarter on a quarter basis. This growth was below economists’ expectations, which were looking for a 0.2% increase. This rate of growth is a step back from last quarter’s 0.3% growth. In Q3, the UK GDP increased by 1.3% year-on-year. That’s very good news, but that was still short of the anticipated growth of 1.4%. In addition, this annualized growth number was no different than the prior quarter, a sign of an economic standstill at best.
The ramifications of these GDP numbers are huge. They indicate potential trouble at the Bank of England (BoE) as they deliberate future monetary policy moves. Should the economic slowdown continue, the BoE could start considering cuts in the face of this weak GDP data. Expectations for a shift in policy grow as soft GDP and production figures increase. This provides further evidence that the new central bank may intervene in the economy should it be necessary to stimulate economic growth.
The drop on GDP for September as measured has a particularly dramatic downward trend. It was a reversal of the positive turnaround from August, again bringing worries of another dangerous trend of economic activity flatlining or perhaps even backtracking. The market is watching these numbers very closely. Investors are interested to see how they will move the needle on monetary policy and a possible change in forward guidance on interest rates.
Analysts stress that GDP numbers are important. They measure the overall worth of all the goods and services produced in the UK during a period of time. They are extremely important indicators of overall economic health and can have a powerful effect on market expectations and investor sentiment.
The current economic climate presents a complex landscape for policymakers and market participants alike. With inflationary pressures still a concern and global economic conditions fluctuating, the BoE faces the challenging task of balancing growth with inflation control. The latest GDP figures will add pressure on the Bank to reconsider its position on interest rates. Should future data reinforce the case for economic weakness, they will probably move.