The United Kingdom has thus far returned to the post-Brexit initial phase of slower economic growth, causing alarm among policymakers and analysts on both sides of the Atlantic. The most recent numbers for the September quarter indicate a rate of growth of only 0.1%. This result is a disappointment considering the forecasts that have been made. Meanwhile, the UK economy shrank in September. Even more concerning is what this slow performance indicates about what’s to come.
The picture for the UK economy is one of great promise. Yet even with such low growth expected, it’s on track to be the second fastest growing economy in the G7 this year. This is particularly notable considering that, throughout the year, the UK economy has managed to defy recessionary pressures that many had anticipated. It has failed to even come close to reversing the trend of weak growth that has defined its recovery.
Your constituents, through their consumer power, have delivered a hugely positive economic story. They’re spending less money as they earn and save more. This prudent mindset is a result of persistent uncertainty over the macroeconomic landscape, as well as people’s own financial circumstances. The accumulation of savings may suggest a reluctance to engage in discretionary spending, which is crucial for stimulating economic activity.
The stronger growth in the first half of the year allowed a little more room to be optimistic. Unfortunately, the latest numbers show that the UK government is having to contend with a deeper than expected fiscal hole, making matters more confusing. Prolonged series of disruptive shocks, in addition to continued doubt around the direction of policy, has deeply wounded the UK economy. These challenges helped create a context in which consumer confidence is still wavering.
Despite these challenges, the cost of borrowing for the UK government has gone down in the capital markets. Recent interest rates for two- and five-year bonds have fallen. Their current levels are now below the rates the Labour government inherited when it came to power. This decrease in borrowing costs should be a welcome reprieve to free-spending policymakers as they continue to figure out their response to this extraordinary economic pain.