Slow growth raises stakes even higher for the Budget

The UK economy registered a weaker-than-expected 0.1% growth in Q3, with a contraction in September partly attributed to a cyber-attack on Jaguar Land Rover, but also reflecting a broader slowdown in consumer-facing services and business investment. This subdued performance, despite avoiding a technical recession, significantly raises the stakes for the upcoming Budget to provide economic certainty, boost confidence, and address a substantial fiscal gap. The decelerating growth, however, increases the likelihood of Bank of England rate cuts, a prospect already reflected in declining government borrowing costs and fixed mortgage rates.

Analysis

The UK economy experienced a weaker-than-expected 0.1% growth in Q3, marked by a contraction in September. This decline was partly attributed to a cyber-attack on Jaguar Land Rover, which led to the worst monthly fall in car production on record outside the pandemic, yet broader economic momentum has clearly flagged beyond this specific event.

Underlying the subdued headline figures is a significant slowdown in consumer-facing services and business investment. Consumers remain cautious, maintaining high savings rates unlike their US counterparts, while businesses are hesitant to invest due to ongoing uncertainty and elevated employment costs, indicating a persistent trend of slow growth with no per-capita expansion.

These disappointing growth figures significantly raise the stakes for the upcoming Budget, which must address a substantial fiscal gap and aim to restore confidence amidst tax speculation. Conversely, the weaker economic data increases the likelihood of a Bank of England rate cut next month, with further cuts anticipated next year, a prospect already reflected in declining government borrowing costs and falling fixed mortgage rates.

Key Decisions for Investors

• Investors should closely monitor the upcoming Budget for concrete measures to address the fiscal gap, boost confidence, and provide tax certainty, as these will significantly influence future economic activity.
• Anticipate potential Bank of England rate cuts, which could support bond markets and provide tailwinds for interest-rate sensitive sectors like housing.
• Evaluate companies with significant exposure to UK consumer-facing services and business investment for continued headwinds, given persistent cautious sentiment and high savings rates.
• Consider potential opportunities in UK fixed income, particularly if further BoE rate cuts materialize, as suggested by declining government borrowing costs and fixed mortgage rates.