12 Sep 2023

Monthly UK Economic Outlook: September

Our economists share their views on the key economic trends to watch in the month ahead.

Marcus Wright

Senior Economist

4 minute read time


With slowing inflation, the Bank of England may be near the end of its rate-hiking cycle – welcome news for consumers and businesses alike. But from an economic perspective, is the damage already done?


Economic momentum weakened in August, with base rate hikes seemingly weighing on growth. A sharp drop in purchasing managers’ index (PIM) readings is consistent with economic stagnation, and there’s worse to come as mortgages move to higher rates. Most UK housing indicators remain well below their long-term averages, but the resilient labour market suggests the drop in house prices should be less severe than in previous downturns.

In better news, real household incomes (once we adjust pay growth for inflation) are increasing. Consumer confidence rebounded last month, and it should recover over the remainder of the year as lower energy bills feed through. 


The economy grew marginally in Q2

The UK economy grew 0.5% in June and by 0.2% in Q2. Business investment saw a healthy rise of 3.4%, although investment in technology and other machinery and equipment fell by 9.8%. Households’ real expenditure increased by 0.7% over the quarter thanks to a strong rise in disposable incomes.

However, interest rate hikes seem to be slowing the economy. Business surveys show a downturn in private sector activity, with the composite PMI down from 50.8 in July to 47.9 in August. Taken literally, the PMIs depict the economy moving from above trend growth in late spring to recession by late summer. We don’t think things are as bad as that, but the PMIs are certainly consistent with ongoing economic stagnation. Activity is being supported by companies working through order backlogs, but once these are depleted over the coming months, the composite PMI will come under additional pressure.

After plunging to -30 in July, the GfK consumer confidence index rebounded to -25 in August. The recent volatility in consumer confidence seems to be reflecting movements in mortgage rates. Meanwhile, households have started to benefit from the boost to their real disposable incomes resulting from the 17% drop in energy bills in July. But weaker consumer confidence was evident in retail sales volumes falling by 1.2% in July, while CHAPS card spending fell 2.6% and continued to fall in August.

What’s next? Households’ real disposable income should continue to rise as wage increases should outpace price rises for the remainder of the year. But mortgage refinancing will persist, and some households will look to save more, while others focus on paying off debt. Corporate insolvency numbers have been rather erratic this year, but the corporate sector does not appear particularly vulnerable and recession risks remain centred on households. Overall, economic growth remains muted, and finely balanced. Consensus expectations are for growth of just 0.3% this year, followed by 0.6% in 2024.


Inflation is down by remains sticky

Consumer price index (CPI) inflation fell from 7.9% in June to 6.8% in July, largely driven by big drops in gas and electricity prices, while food inflation fell from 17.3% to 14.9%.

But we’re yet to see a turning point in the underlying rate. The Bank of England focuses on what happens to core CPI (which strips out food and energy), and this held steady at 6.9%. What’s more, services inflation overtook consumer goods inflation for the first time since April 2021, hitting 7.4%.

CPI inflation seems likely to fall further in the coming months, driven by base effects and sharp drops in energy prices. Goods inflation should continue to fall too, with producer price data pointing to easing pressure down the line. Food prices, another key driver of households’ inflation expectations, are also slowing. 


Annual change of Consumer Price Index

Source: ONS


Strong wage growth likely to lead to further rate hikes

Slack is increasing in the labour market. The three-month average headline unemployment rate hit 4.2% in June, up from 4.0% in the three months to May. Redundancies also picked up, although they remain historically low.

But there’s still too much wage growth for the Bank of England to stop tightening yet. While year-on-year growth in average weekly earnings fell from 7.8% in May to 7.3% in June, increasing slack in the labour market is clearly having limited impact on wage growth. That’s likely to change, but only slowly.

Demand for labour is still falling, with the number of people in employment plunging by 66,000 in June, driven by lower numbers of self-employed people and full-time employees. Meanwhile, the vacancy-to-unemployment ratio is back to 2019 levels, down from 0.77 in May to 0.72 in June. It looks set to continue to drop in the coming months as vacancies fall further.

At the same time, the workforce expanded by 0.9% year-on-year in Q2. The KPMG/REC Jobs Report total staff availability index increased at its fastest pace since December 2020 in June, rising from 57.6 in May to 61.6. This was linked to a rise in the number of job seekers due to redundancies and reduced hiring activity.

Overall, the impact of higher borrowing costs is being seen in the labour market and slack will continue to develop. The unemployment rate will rise further, with consensus expectations of a peak of 4.5% in 2024. 


Regular pay growth (% change year on year)

Source: ONS


The BoE's base rate still hasn't peaked

The Bank of England has signalled that the end of its tightening cycle is near, by reducing the size of hikes and by adding new wording suggesting that rates are in “restrictive territory”. That said, further hikes can’t be ruled out.

Market expectations for the number of hikes still to come have fallen from three to two in recent weeks as growth concerns weigh more heavily on the outlook. Consensus expectations are for one more hike to a peak of 5.50%, down considerably from recent months. Signs of emerging labour market slack and easing inflation should lead the Bank to press the stop button soon. But, as ever, this will be largely dependent on upcoming data releases.


Has August PMI data cooled market expectations of rate hikes?


Source: Bank of England, OIS Forward Yield Curve

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