NIESR Sees High Risk Of Contraction In UK GDP

NIESR Sees High Risk Of Contraction In UK GDP

December 12, 2022

Despite the monthly growth in the gross domestic product during October, the UK economy is likely to stagnate or shrink in the final quarter of this year, the National Institute of Economic and Social Research, or NIESR, said Monday.

ONS data showed earlier on Monday that GDP grew 0.5 percent monthly in October, which was largely attributable to the weakness in September resulting from the additional bank holiday for the state funeral of HM Queen Elizabeth II.

There was a strong pick-up in wholesale and retail trade, and repair of motor vehicles and motorcycles, which were apparently strongly affected by the additional bank holiday.

However, GDP shrank 0.3 percent in the quarter to October, driven by a 1.7 percent decrease in production.

Though the monthly figure signaled a seemingly positive outlook, forecast suggests that the risk of a contraction in GDP in the last quarter of this year remains elevated, the think tank said in its monthly GDP tracker report.

“There are still strong downside risks to GDP in the fourth quarter of this year due to high inflation and interest rates -which continue to suppress demand -and supply chain disruptions, as well as work backlogs due to industrial action and a tight labor market -which continue to weigh on business growth,” NIESR Associate Economist Paula Carbo said.

“We still expect GDP to remain flat in the fourth quarter of this year.”

Recent CIPS/S&P Global purchasing managers surveys showed decline in activity in both the manufacturing and services sectors and a modest growth in the construction industry. These signal a strong risk that anemic business activity will drag on GDP in the fourth quarter, the NIESR said.

While survey data revealed a rebound in business confidence in November, after the slump induced by the Truss government and its ‘mini-budget’, strong pessimism regarding the outlook prevails among the firms in all three sectors as increasing evidence of the UK economy in recession emerge.

High prices, interest rates and uncertainty, which continue to hurt household and business spending, alongside supply-side issues like labor shortages and strike action, all bode poorly for UK economic performance in the fourth quarter of this year, the NIESR said.

However, the institute expects growth in the construction sector alongside the seasonal increase in consumption to result in GDP remaining flat in the fourth quarter.

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