FLAT NOTE
UK economy flatlines as GDP revised down amid warnings over growth – what it means for your money
Scroll down to find out what the latest data means for you
THE UK economy flatlined in the third quarter of this year, the latest official figures show, amid warnings over growth.
GDP came in at zero for the three months from July to September according to The Office for National Statistics (ONS) - a downward revision down from the 0.1% increase it previously estimated.
It comes as businesses warned that Britain's economy was “headed for the worst of all worlds” next year.
GDP (Gross Domestic Product) is a measure of how well the economy is doing.
When GDP goes up, the economy is generally thought to be doing well. But when GDP falls, the economy isn't doing so well.
The ONS publishes GDP figures each month and each quarter. It makes revisions if new data becomes available.
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It said there was no growth in the services sector between July and September while a 0.7% increase in the construction sector was offset by a 0.4% fall in production.
Meanwhile, it said early estimates suggested real households' disposable income per head show no growth in the third quarter.
Liz McKeown, director of economic statistics at the ONS, said: "The economy was weaker in the second and third quarters of this year than our initial estimates suggested, with bars and restaurants, legal firms and advertising, in particular, performing less well.
"Meanwhile real household disposable income per head showed no growth."
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The latest revised data comes after the Prime Minister was warned the UK economy was "headed for the worst" with firms set to cut back on production and hire fewer staff in the New Year.
A survey by the Confederation of British Industry (CBI) found the upcoming hike to employer National Insurance contributions (NICs) was given as one of the main reasons for the sense of gloom among bosses.
What is the Bank of England base rate and how does it affect me?
The survey found expectations for growth have hit their lowest since the aftermath of former PM Liz Truss’s disastrous 2022 mini Budget.
Alpesh Paleja, of the CBI, said: “There is little festive cheer in our latest surveys, which suggest the economy is headed for the worst of all worlds.
"Firms expect to reduce both output and hiring, and price growth expectations are getting firmer.
“Businesses continue to cite the impact of measures announced in the Budget, particularly the rise in employer NICs, exacerbating an already tepid demand environment.”
The quarterly GDP figures published today cover the period prior to the government's announcement of changes to NICs, which came in the Autumn Budget on October 30.
GDP was 0.5% in the quarter from April to June, meaning there have been two consecutive quarters of low to no growth.
The latest monthly figures, published last week, show the economy unexpectedly shrunk in October by 0.1%.
Chancellor Rachel Reeves said: "The challenge we face to fix our economy and properly fund our public finances after 15 years of neglect is huge.
“But this is only fuelling our fire to deliver for working people.
“The Budget and our plan for change will deliver sustainable long-term growth, putting more money in people’s pockets through increased investment and relentless reform.”
What it means for your money
GDP measures the economic output of companies, individuals and governments.
If it is rising steadily, but not too much, it is a sign of a healthy and prosperous economy.
This is because it usually means people are spending more, the government gets more tax and workers get better pay rises.
It also generally means lower inflation as companies don't have to up their prices to cover for shortfalls in their coffers.
The Bank of England (BoE) also uses GDP and inflation as key indicators when determining the base rate.
This decides how much it will charge banks to lend them money and is a way to try to control inflation and the economy.
Usually when inflation is low, the BoE cuts interest rates to try to speed the economy up.
However, the Government's decision to increase employer National Insurance contributions from 13.8% to 15% next April has raised fears the UK economy will suffer.
This is because there are expectations businesses won't be able to absorb the costs and will pass this on to consumers which will see prices rise.
This could lead to the BoE not cutting interest rates as much as previously thought.
The BoE's Monetary Policy Committee, which decides the base rate, most recently met last week and opted to keep interest rates the same.
It came after the ONS reported inflation rose to 2.6% in November, up from 2.3% in October.
The bank's Governor, Andrew Bailey, said it needed to see inflation slow further before it could go ahead with further rate cuts.
He said: "We think a gradual approach to future interest rate cuts remains right, but with the heightened uncertainty in the economy we can’t commit to when or by how much we will cut rates in the coming year."
Meanwhile, there are fears the gloomy economic outlook will lead to job losses and even store closures.
The latest S&P Global Flash UK Purchasing Managers' Index (PMI) found companies reported the sharpest fall in the number of workers since January 2021, during the coronavirus pandemic.
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If growth across the UK continues to fall, it could see the economy enter a recession - defined as two quarters of declining GDP.
The UK was last in a recession at the end of 2023, when the final six months of the year saw the economy shrink.
What is the base rate and how does it affect the economy?
NINE members of the Bank of England's Monetary Policy Committee meet eight times each year to set the base rate.
Any change to the Bank's rate can have wide-reaching consequences as it directly influences both:
- The cost that lenders charge people to borrow money
- The amount of savings interest banks pay out to customers.
When the Bank of England lowers interest rates, consumers tend to increase spending.
This can directly affect the country's GDP and help steer the economy into growth and out of a recession.
In this scenario, the cost of borrowing is usually cheap, and the biggest winners here are first-time buyers and homeowners with mortgages.
But those with savings tend to lose out.
However, when more credit is available to consumers, demand can increase, and prices tend to rise.
And if the inflation rate rises substantially - the Bank of England might increase interest rates to bring prices back down.
When the cost of borrowing rises - consumers and businesses have less money to spend, and in theory, as demand for goods and services falls, so should prices.
The Bank of England is tasked with keeping inflation at 2%, and hiking interest rates is a way of trying to reach this target.
In this scenario, the losers are those with debt.
First-time buyers will lose out to cheaper mortgage rates, and those on tracker or standard variable rate mortgages are usually impacted by hikes to the base rate immediately.
Those on a fixed-rate deal tend to be safe if they fixed when interest rates were lower - but their bills could drastically increase when it's time to remortgage.
The cost of borrowing through loans, credit cards and overdrafts also increases when the base rate rises.
However, the winners in this scenario are those with money to save.
Banks tend to battle it out by offering market-leading saving rates when the base rate is high.
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