The U.K. economy demonstrated stronger than anticipated growth in November, primarily driven by the services sector. While concerns regarding a recession in the second half of 2023 still linger, recent figures offer a glimmer of hope.

According to information released by the Office for National Statistics on Friday, gross domestic product (GDP) increased by 0.3% compared to the previous month. This surpassed expectations, as economists polled by The Wall Street Journal had predicted a growth rate of just 0.2%.

However, it is important to note that this growth only reverses a 0.3% contraction observed in October, meaning the country remains in a delicate economic state. The ONS cautioned that if there is no expansion in December, the final quarter of 2023 will experience stagnant growth.

On a more stable three-month basis, GDP contracted by 0.2% from September to November when compared to the previous three months. In the third quarter, the U.K. economy shrank by 0.1%. Sustaining this decline for two subsequent quarters would officially classify the economy as being in a technical recession.

Grant Fitzner, Chief Economist at the ONS, stated that despite these recent figures, the overall long-term outlook portrays an economy with limited growth over the past year.

Samuel Tombs, Chief U.K. Economist at Pantheon Macroeconomics, acknowledged the possibility of a second consecutive quarterly decline but emphasized that labeling it as a recession would be overstating matters. He cited rising employment rates and the recovery of business and consumer confidence as factors mitigating the potential impact of a slight drop in GDP.

Looking ahead, there is optimism that the economy could gain momentum with the aid of rate cuts, leading to increased consumer spending and improved real incomes. FactSet data suggests that economic growth in 2024 may reach 0.4%.

Services Sector Shows Growth in November

The services sector in the UK experienced a 0.4% growth in November, following a slight decline of 0.1% in October, according to the Office for National Statistics (ONS). This increase was primarily driven by a rise in the information-and-communications sector. The resurgence of consumer-facing industries can be attributed to the recovery from Storm Babet's impact in October, as well as the delayed school holidays in certain regions. Additionally, reduced industrial action positively influenced activity in sectors such as health, transport, and TV and film production.

Although this growth in services output is promising, it may also raise concerns at the Bank of England. The central bank has been closely monitoring inflation in the sector as part of its efforts to control rising prices. An increase in demand within the services sector could potentially lead to price hikes.

Money markets are already factoring in the possibility of a rate cut at the Bank of England's May meeting, as indicated by Refinitiv data following the release of GDP figures.

Industrial Production and Construction Output

In November, industrial production witnessed a growth of 0.3% compared to a decline of 1.3% in October. This positive development was largely driven by a recovery in the manufacturing sector. However, construction output experienced a decrease of 0.2% following a 0.4% fall in October. This slowdown indicates ongoing challenges within the UK's housing sector, which has been particularly affected by high interest rates.

Predictions for Wage Growth and Inflation

Ed Frankl, an industry expert, highlighted the possibility of lingering constraints on domestic supply impeding wage growth and services inflation from declining as swiftly as anticipated. This perspective challenges the prevailing expectation of an interest rate cut from the Bank of England in mid-2024 and suggests that it may not occur until later that year.

Current market trends show that money markets are pricing in a potential early rate cut, with June being the most likely timeframe. However, Refinitiv data also suggests a high probability of a rate cut as early as May.

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