Is UK Growth Slowing More Than We Anticipated in Q3?

The UK economy grew by a weaker-than-expected 0.1% in the July-to-September period, primarily driven by the services sector, even as the production sector faced contraction. This disappointing growth, which falls short of analysts’ expectations of 0.2%, comes amid looming tax increases anticipated in the forthcoming Budget, as Chancellor Rachel Reeves seeks to adhere to her self-imposed borrowing rules.

Last updated: 10 October 2023 (BST)

What’s happening now

The latest data from the Office for National Statistics (ONS) reveals that the UK economy's growth rate for the third quarter is lower than anticipated. The services sector showed resilience, contributing positively to the overall growth. However, a notable decline in the production sector, particularly in manufacturing, has raised concerns about the economy's stability. The contraction in September by 0.1% highlights the vulnerabilities within the economy, exacerbated by significant drops in car production linked to a cyber attack on Jaguar Land Rover (JLR).

Key takeaways

The UK economy grew by just 0.1% in Q3 2023, below the expected 0.2%.
Services drove growth, but the production sector, especially manufacturing, contracted.
The contraction in September reflects a significant fall in car production due to a cyber attack on JLR.
Chancellor Rachel Reeves is expected to raise taxes in the upcoming Budget to meet borrowing targets.
Analysts caution about the overall health of the economy moving forward.

Timeline: how we got here

Understanding the current state of the UK economy requires a brief overview of recent events:

July 2023: The UK economy showed signs of growth, with early reports indicating positive performance in the services sector.
August 2023: Manufacturing begins to show weakness, raising early concerns about the sustainability of growth.
September 2023: A cyber attack on JLR significantly impacts car production, contributing to an overall contraction of 0.1% for the month.
October 2023: ONS releases Q3 growth figures, confirming growth of only 0.1%, leading to increased scrutiny ahead of the forthcoming Budget.

What’s new vs what’s known

New today/this week

The ONS figures released indicate that the UK economy's growth in Q3 was lower than anticipated, raising concerns regarding the sustainability of current growth trends. The contraction in production, particularly in manufacturing, is a new development that analysts are closely monitoring, especially in light of the recent cyber attack affecting a major player in the automotive sector.

What was already established

Prior to these figures, there had been a general optimism about the UK's economic recovery post-pandemic, with expectations of growth bolstered by robust performance in the services sector. However, the underlying weaknesses in manufacturing and production had been flagged by analysts as potential risks to the recovery.

Impact for the UK

Consumers and households

The slower-than-expected growth has direct implications for UK households. With inflation still a concern, the anticipated tax increases in the upcoming Budget could further strain family budgets. Rising costs of living, compounded by stagnant wage growth, make for a challenging environment for consumers who are already feeling the pinch.

Businesses and jobs

For businesses, particularly in the manufacturing sector, the contraction raises alarms about future hiring and investment decisions. The impact of the cyber attack on JLR has wider implications for the automotive supply chain, potentially leading to job losses and reduced output in a critical sector of the UK economy.

Policy and regulation

The government, under Chancellor Rachel Reeves, is preparing for a Budget that may introduce tax increases aimed at stabilising public finances. Policymakers will need to balance the need for fiscal responsibility with the imperative to support growth and protect jobs, especially in sectors that are struggling.

Numbers that matter

0.1%: The growth rate of the UK economy for Q3 2023, lower than the expected 0.2%.
-0.1%: The contraction of the economy in September 2023, signalling a downturn.
G7: The UK was the fastest-growing economy in this group during the first half of 2023.
Manufacturing: The primary sector impacted by the recent downturn, with significant falls noted in car production.
Chancellor's Budget: Set to address the economic challenges facing households and businesses amid rising costs.

Definitions and jargon buster

ONS: Office for National Statistics, the UK’s largest independent producer of official statistics.
G7: Group of Seven, an intergovernmental organisation of Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.
Manufacturing: The sector of the economy that produces goods using labour and machines.

How to think about the next steps

Near term (0–4 weeks)

In the immediate future, focus will be on the upcoming Budget announcements. Stakeholders should prepare for possible tax increases and anticipate how these may affect disposable incomes and business planning.

Medium term (1–6 months)

Over the next few months, officials will need to monitor economic indicators such as consumer confidence, inflation rates, and manufacturing output to gauge the effectiveness of policy measures introduced in the Budget.

Signals to watch

Changes in consumer spending patterns, particularly in response to tax changes.
Manufacturing output figures, especially from key sectors like automotive.
Inflation rates which could impact the overall economic sentiment.

Practical guidance

Do

Stay informed on economic developments and how they may affect personal finances.
Review budgets and make adjustments in anticipation of possible tax increases.
Consider diversifying investments to mitigate potential risks in the manufacturing sector.

Don’t

Ignore signs of economic downturn; prepare for potential impacts on job security and income.
Overlook the importance of monitoring government announcements and economic reports.
Assume that the current growth trend will continue without challenges.

Checklist

Review personal and business budgets for flexibility.
Stay updated on ONS reports and government announcements.
Evaluate exposure to sectors vulnerable to economic shifts.
Consider financial advice to navigate potential tax changes.
Monitor inflation and consumer price index trends regularly.

Risks, caveats, and uncertainties

The current economic landscape is fraught with uncertainties. The anticipated tax increases could dampen consumer spending, which in turn may stifle economic growth. Additionally, any further disruptions in manufacturing, whether due to external shocks like cyber attacks or internal inefficiencies, could lead to a deeper contraction. Analysts caution that while growth is still possible, the risks of a downturn are evident and must be managed carefully.

Bottom line

The UK economy is currently facing a challenging period, with growth figures disappointing and significant risks on the horizon. As households prepare for potential tax increases and businesses navigate a contracting manufacturing sector, the upcoming Budget will be crucial in determining the path forward. Stakeholders must remain vigilant, adapting to changes while anticipating the government's fiscal strategies.

FAQs

What caused the UK economy to grow only 0.1% in Q3 2023?

The UK economy's growth was primarily driven by the services sector, while the production sector contracted, particularly due to a marked fall in manufacturing and car production.

What impact will the upcoming Budget have on UK households?

The upcoming Budget is expected to introduce tax increases, which could further strain household finances already affected by inflation and rising living costs.

How does the current economic growth compare to previous months?

The growth of 0.1% in Q3 2023 is weaker than the 0.2% growth analysts had anticipated, suggesting a slowing economy compared to earlier in the year.