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Base rate likely to be held in November as UK economy grows 0.2%

Base rate likely to be held in November as UK economy grows 0.2%
Samantha Partington
Written By:
Samantha Partington

The UK economy grew by an estimated 0.2% in August, leading experts to speculate that the Bank of England is likely to keep the base rate at 5.25% at its next meeting in November.

GDP measures the value of goods and services produced in the UK. It estimates the size of and growth in the economy.

August’s growth follows a 0.6% decline in GDP in July, which has been revised down from the 0.5% contraction previously published after figures were worse than initially recorded.

The services sector was the main contributor to August’s economic growth, the Office for National Statistics (ONS) suggested.

Output in the sector grew 0.4% in August following a fall of 0.6% the month before.

Meanwhile, output in consumer-facing services fell by 0.6% while production output fell by 0.7%.
The construction sector fell by 0.5%.

More broadly, the ONS said that GDP showed 0.3% growth in the three months to August 2023 when compared with the previous three months.

Production grew by 1.2% and was the main contributing sector to the three-month growth. Services output rose by 0.1% and construction by 0.9%.

Mixed prospects for UK economy

Despite the increase, economists and experts painted a mixed picture on the direction of the UK economy.

“Outlook for the economy remains lacklustre as high interest rates continue to bite” said Yael Selfin, chief economist at KPMG UK.

“Today’s data are consistent with our assessment that the economy entered a broad-based slowdown in late summer which has deteriorated further in recent months. Services are no longer benefitting from the post-pandemic recovery in demand, while the construction sector is weakened by subdued outlook for the housing market on the back of tighter financial conditions.

“Looking ahead, momentum is expected to slow further in the coming months. Although we expect the economy to grow by around 0.6 per cent this year, the outlook for growth in the medium term is weak by historical standards.”

Meanwhile Emma-Lou Montgomery, associate director for personal investing at Fidelity International, said: “Economy-watchers can breathe a small sigh of relief today as hopes of modest growth in the UK economy in August came to fruition. And while small, that growth is made a little sweeter still after the July fall was revised down further.

“The UK must still avoid negative readings in the remaining two quarters of the year if recession is to be averted, so these are early days yet, but the signs are positive, for now.

“And, the IMF report stating that the UK will have the highest inflation and slowest growth next year of any G7 economy, falling behind the US, France, Germany, Canada, Italy and Japan, will still be ringing in many peoples’ ears.

Base rate rise averted?

Montgomery added that the next development in interest rate movements would play a part in the UK’s prospects for next year.

“If, as financial markets seem to think, the Bank of England base rate has peaked at 5.25%, then maybe the IMF’s predictions will look weaker,” she said. “But if previous higher forecasts come true, then it’s a different story. Because the difference between 5.25% and the previous peak forecast of 6% would be substantial in terms of its economic impact.”

Victoria Scholar, head of investment at Interactive Investor, noted that the latest GDP figure was likely to give the BoE pause at the next meeting in November.

She said: “UK GDP rebounded slightly in August. Across the last three months, the economy grew modestly by 0.3% driven by car manufacturing and sales, and construction.

“With a sluggish UK growth backdrop, inflation coming down, and signs of slack emerging in the labour market, the Bank of England is likely to keep rates on hold again at its next meeting in November.”