Rates may go down as UK economy recovers gradually

The UK economy’s gradual recovery in August has led to expectations that interest rates will remain unchanged in the upcoming month. The economy saw a marginal growth of 0.2% in August following a sharp decline in July. Analysts have described these figures as lacklustre, highlighting that higher borrowing costs and the increased cost of living are placing a burden on consumers and businesses.

The Bank of England held interest rates at 5.25% in September, marking the end of a streak of 14 consecutive rate hikes as inflation began to slow. Economists perceive the current economic scenario as one where the economy is making only slow progress, and concerns about a possible recession linger.

Bank of England governor Andrew Bailey acknowledged that there were “increasing signs” that higher rates were affecting the economy. Dr. Swati Dhingra, a member of the Bank of England’s rate-setting committee, suggested that in a low-growth environment like the current one, the risk of a recession remains balanced.

August’s marginal economic growth was influenced by the recovery in the education sector after strike action, as well as a boost from the computer programming and engineering sectors. However, some areas, such as arts, entertainment, and recreation, fared poorly. The sports and amusement activities sector saw a decline of more than 10% in August.

The overall economic picture is characterised by slow growth and persistent inflation, a situation that some describe as “stagflation.” With such meagre growth, a recession is starting to feel increasingly likely, and there is a sense that the economy’s resilience is weakening.

The outlook for the UK remains lacklustre due to the impact of high interest rates. Economic experts suggest that the flatlining growth points towards unchanged interest rates in November. The upcoming figure that shows the economy’s performance over three months will be monitored more closely than August’s single monthly figure.

The UK economy has grown modestly over the past three months, partly due to a boost from car manufacturing, sales, and construction. While Chancellor Jeremy Hunt has expressed optimism about the economy’s resilience, the shadow chancellor, Rachel Reeves, believes that the economy is trapped in a low-growth, high-tax cycle that is leaving working people worse off.

In a recent clash, the International Monetary Fund (IMF) and the UK government had differing views. The IMF’s forecast suggests that the UK will have the highest inflation and slowest growth among G7 economies next year, while the Treasury argues that the IMF’s report does not take into account recent revisions to UK growth.

The UK economy has managed to recover to a level 2.1% larger than it was in February 2020, before the onset of the COVID-19 pandemic. This recovery is a notable achievement given the challenges posed by the pandemic.