22 Nov 2023

Monthly UK Economic Outlook: November

It’s often said that monetary policy operates with long and variable lags. The rate tightening cycle that got underway two years ago now seems to be biting a little harder, with the UK economy not growing in Q3. To be fair, while that reflects the impact of rising borrowing costs, both public sector strikes and weather-related disruptions also played a part. 

Marcus Wright

Senior Economist

4 minute read time


The labour market was red-hot a year ago, but it’s cooler now. The workforce is expanding due to rising immigration and cost-of-living pressures jolting some people out of inactivity. But there are two caveats: first, firms are not cutting headcount in any meaningful way; and second, slack is yet to put meaningful brakes on the pace of wage growth. 

While inflation looks set to fall sharply in the coming months thanks to reduced pressure on energy, goods and food prices, there’s still work to be done. Services inflation is still high, with the September print only slightly lower than August. 

Combined, subdued growth, weaker labour market conditions and lower-than-expected inflation in September were enough to persuade the Bank of England to remain on hold at its November meeting. So, the big question is: are we done with rate hikes? Most probably yes, but cuts will be slow to come.


UK economy grew slightly in September, but the business and consumer confidence is likely to remain subdued

The UK economy grew by 0.2% in September (no growth had been predicted). Real gross domestic product (GDP) remained flat in Q3, exceeding consensus expectations of a 0.1% contraction. Business investment fell by 4.2% over the quarter and real government expenditure was also down, reflecting the impact of public sector strikes. Households’ real expenditure was down by 0.4%.

Surveys of businesses and households paint a challenging picture. Services activity continues to fall, hit by subdued consumer confidence, the impact of high borrowing costs and weak demand from the real estate sector. Meanwhile, manufacturing output is now down for eight months in a row, and further falls look likely. 

Consumer confidence, which was already weak, fell sharply in October, with the pressures of meeting the costs of heating their homes and filling their petrol tanks, surging mortgage and rental rates, a slowing jobs market and the uncertainties posed by conflict in the Middle East all contributing to a sense of growing unease. 

On the positive side, households’ real disposable income is expected to increase as average weekly wages look set to rise more quickly than consumer prices in Q4. The resumption of cost-of-living grants to low-income households will boost their real disposable incomes, and companies’ investment intentions are still robust. But there are still some headwinds. For example, mortgage refinancing will continue to hit disposable income, and households are rebuilding their savings. 

Consensus expectations are for the economy to shrink by 0.1% in Q4, and to effectively flatline through the early part of 2024. It looks set to remain vulnerable to shocks before it gains momentum in the second half of next year.


UK business activity lost momentum in October (PMIs)

Sources: NatWest, Decision Makers Panel Survey, The Bank of England


Inflation set to fall further

UK inflation remained unchanged at 6.7% year-on-year in September. While the pace of rising food prices has slowed, transport and education prices were higher than expected. Core consumer price index (CPI) inflation fell slightly from 6.2% in August to 6.1% but services inflation edged up, pointing to persistence in underlying pay pressures. 

The headline rate of CPI inflation should fall sharply from here, with the typical household’s annual energy bill set to drop from £2,500 a year ago to £1,834. Food inflation is also likely to fall, with producer output prices for food indicating a strong disinflationary trend in the coming months. Meanwhile, goods inflation has been dropping more quickly than expected thanks to easing input cost pressures. 

However, services CPI inflation remains high, mainly due to high wage growth. Come 2024, though, services inflation is expected to fall gradually as the labour market weakens. But there are still risks that inflation could persist: for example, firms might look to rebuild margins as economic conditions stabilise. 

Overall, headline CPI inflation is expected to fall to 4.4% year-on-year in Q1 next year and return to target by mid-2025.


Inflation looks set to fall as we move into the year ahead

Sources: The Office for National Statistics, NatWest


Further loosening in the labour market but it remains tight by historical standards

There are clear signs that the labour market is cooling. Unemployment is rising, employment is falling, vacancies are down, and surveys suggest firms are hesitant to hire. 

This is all because firms are pulling back on hiring amid rising borrowing costs and tighter budgets, although temporary staff hiring is holding up slightly better. But so far there are very few signs that we’ll see a significant reduction in staffing levels. In particular, the Insolvency Survey shows that while redundancy notifications have been edging up since mid-September, they remain low. 

Meanwhile, labour supply is set to expand. A 0.8% year-on-year increase in the workforce in Q2 was in large part driven by growth in non-UK nationals. And the high cost of living and sharp fall in pensions wealth over the past 18 months will continue to bear down on the number of people taking early retirement. So, it’s no surprise that it’s becoming a bit easier for firms to find staff. 

But the cooling labour market is yet to meaningfully influence the pace of wage growth. Growth in average weekly earnings, excluding bonuses, remained at an elevated 7.8% year-on-year in August, down just 10bp from July, while realised wage growth in the three months to October was unchanged at 6.9%.

Overall, the impact of rising borrowing costs and shrinking margins is being more clearly reflected in the labour market. It’s likely that slack will continue to increase from here. The consensus estimate of the peak unemployment rate has edged up to 4.8% by Q1 2025, but that’s still a low level by historical standards. 


The labour market looks set to continue cooling

Source: KPMG, NatWest


Bank of England is signalling a prolonged pause on rate hikes, but markets aren’t convinced

The Bank of England kept interest rates on hold in November. This decision came after the US Federal Reserve and European Central Bank (ECB) also kept rates where they were, bolstering investors’ confidence that the global rate hiking cycle might be over. But the bank warned that monetary policy will need to remain restrictive for “an extended period of time” despite the bleak economic outlook. 

Markets are now pricing in three rate cuts by the end of 2024. But policymakers are likely to want to see more convincing signs that the labour market is weakening and pay pressures easing before they signal any loosening of monetary policy. Once such signs are apparent, their stance could reverse quickly. Markets increasingly seem to have expected this in recent weeks.  

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