The UK economy grew by more than expected in October, although experts have pointed out that this surprise upswing will be temporary and the UK still looks likely to go into recession. 
The latest estimate from the Office for National Statistics said the economy grew by 0.5% in October compared with the previous month, when it contracted 0.6%. September was affected by the extra bank holiday for the state funeral of HM Queen Elizabeth II.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said: “The monthly rise of gross domestic product of 0.5% in October is likely to have been more of a temporary upswing rather than the start of a more positive chapter for the economy.”
October’s growth was driven by the services sector, where output was 0.6% higher than in September, when companies scaled back promotional events during the UK’s mourning period and many businesses closed their doors on the day of the funeral. Activity in construction was slightly up in October while production was flat.
Contributions to monthly GDP growth, Oct 2021 to Oct 2022
Source: Office for National Statistics
Marcus Brookes, chief investment officer at Quilter Investors, said: “In isolation [October’s growth] should be celebrated, but looking at the wider context and the picture for the UK economy remains an unhealthy one as we head into the winter months.”
This is borne out by the ONS data: GDP fell by 0.3% in the three months to October 2022 compared with the three months to July 2022. Monthly GDP is now estimated to be 0.4% above its pre-coronavirus levels.
Melanie Baker, senior economist at Royal London Asset Management, said September and October’s data together paints a downbeat picture of UK economic growth going into the final quarter of 2022
“The level of GDP is barely above where it was pre-pandemic, part of the bounce in services output was down to vaccination and test & trace activity and more than half the manufacturing subsectors saw declines in output,” she said.
Recent data adds to the pessimistic tone. The S&P Global CIPS purchasing managers’ indices – which surveys companies about output, new orders, employment and other business conditions – suggest manufacturing and services contracted in November while growth in construction was marginal.
Baker said: “The UK could escape a technical recession (for now) if November and December output was flat, but falling output would be more consistent with the picture being painted by business surveys. With inflation as strong as it is, and despite the downbeat picture for economic activity, another Bank of England rate hike is very likely on Thursday.”
The Bank of England is expected to lift the base rate by another 50 basis points at this week’s Monetary Policy Committee meeting, taking them to 3.5% – the highest since before the global financial crisis and substantially more than the 0.25% it was at 12 months ago.
UK consumer prices inflation currently stands at 11.1%, which is a four-decade high. Higher interest rates are being used to tackle surging inflation but this also runs the risk of pushing the economy into recession and markets have sold off across the board because of this.
Quilter’s Brookes finished: “For investors, however, the path for interest rates is looking a lot clearer than it did just a few months ago and as such a lot of this negative news is already priced in. Rates are expected to keep rising, but not necessarily as high as they once were thought to have to go to.
“The journey may continue to be bumpy for investors in the short term while inflation remains present but now is exactly the wrong sort of time for investors to flee from the market and sit in cash. Looking for quality businesses that can not only survive the tough times but thrive as things begin to get a bit brighter into next year and beyond.”