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UK Economy Contracts in September Amid Challenges to Growth Ambitions

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The United Kingdom’s economy shrank by 0.1% in September, marking an unexpected setback to Finance Minister Rachel Reeves’ plans for sustained economic growth. Over the third quarter, growth slowed to just 0.1%, down from 0.5% in the second quarter, according to data released by the Office for National Statistics (ONS) on Friday.

Economic Performance Below Expectations

The September contraction, attributed to stagnation in the services sector alongside declines in manufacturing and construction, underperformed forecasts from economists and the Bank of England (BoE), which had predicted 0.2% quarterly growth. The slowdown follows a stronger first half of 2024 when the economy rebounded from the effects of last year’s mild recession.

Despite the disappointing figures, there was a notable 1.2% quarterly increase in business investment, marking four consecutive quarters of growth in this area. However, broader economic challenges overshadowed this progress.

Reeves’ Growth Agenda

Finance Minister Rachel Reeves acknowledged the need for more robust economic performance. “Improving economic growth is at the heart of everything I am seeking to achieve, which is why I am not satisfied with these numbers,” she said, reiterating her commitment to stimulating growth through investment and regulatory reforms.

Reeves recently announced plans to overhaul regulations governing the UK’s financial sector, labeling it a “crown jewel” of the economy. Her big-spending budget, coupled with these reforms, is designed to drive short-term recovery and position the UK for stronger growth in the coming years.

However, critics argue that Labour’s landslide election victory in July, and subsequent rhetoric about weak economic conditions, has dampened confidence. The opposition Conservative Party accused Reeves of “talking down” the economy.

Challenges Ahead

The Bank of England revised its annual growth forecast for 2024 downward to 1% from 1.25%, though it expects a stronger performance in 2025. Britain’s economic output has been sluggish since the COVID-19 pandemic, with growth of just 3% since late 2019. Among major advanced economies, only Germany has fared worse, heavily impacted by rising energy costs following Russia’s invasion of Ukraine.

Sanjay Raja, chief UK economist at Deutsche Bank, warned of potential risks on the horizon, including increased taxes on businesses, which could dampen private sector investment and hiring. “We still see positive momentum into 2025, but downside risks are brewing,” he said, citing geopolitical tensions and the potential for a trade war.

Long-Term Growth Ambitions

Prime Minister Keir Starmer and Reeves have set ambitious economic targets, including achieving annual growth of 2.5%, a level not consistently reached since before the 2008 financial crisis. Reeves has also pledged to position the UK as the fastest-growing economy per capita among the G7 nations for two consecutive years.

However, Friday’s data highlights the challenges in reaching these goals. GDP per capita fell by 0.1% in the third quarter and remained flat compared to the previous year, with no annual growth recorded since 2022.

Outlook

The latest figures underscore the complexity of the UK’s economic recovery. While targeted investments and reforms aim to provide a pathway to growth, global uncertainties, domestic policy risks, and stagnant GDP per capita present significant obstacles. Analysts agree that the coming quarters will be crucial in determining the success of Reeves’ growth push.

 

China’s Q3 GDP Slows to Weakest Pace Since Early 2023, Prompting Calls for More Stimulus

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China’s economy grew at its slowest pace since early 2023 in the third quarter, as the country’s ongoing property sector crisis continues to hamper growth. Although consumption and factory output exceeded expectations in September, the real estate downturn remains a significant challenge. Beijing has introduced several stimulus measures, but markets are still waiting for more clarity on the scope of these interventions and how they will support long-term growth.

In the July-September period, China’s GDP expanded by 4.6%, slightly above the forecast of 4.5% but below the 4.7% growth seen in the second quarter. Bruce Pang, Chief Economist at JLL, noted that this performance was largely expected, citing weak domestic demand, a struggling housing market, and sluggish export growth as key factors behind the slowdown. He emphasized that the effects of the late September stimulus package will take time to materialize and bolster growth in the coming quarters.

Despite these challenges, Chinese officials expressed confidence in achieving the government’s annual growth target of around 5%. Sheng Laiyun, deputy head of China’s statistics bureau, stated during a post-data press conference that further policy support, including a reduction in banks’ reserve requirements, would help sustain the economic recovery. He predicted continued stabilization in the fourth quarter, underpinned by improved consumption and industrial output figures.

While industrial output and retail sales data for September beat forecasts, the property sector remains a sore spot. Betty Wang, an economist at Oxford Economics, downplayed the significance of the better-than-expected September numbers, noting that structural issues in the real estate and household sectors persist. She warned that while the recent stimulus measures may cushion downside risks to 2024 growth, they are unlikely to reverse the broader structural downturn.

A Reuters poll suggests China’s economy will expand by 4.8% in 2024, below Beijing’s target, with growth slowing further to 4.5% in 2025.

PROPERTY SECTOR WOES

On a quarter-to-quarter basis, the economy grew by 0.9% in Q3, up from a revised 0.5% in Q2, but below the forecast of 1.0%. The weakness of the property sector remains a central concern, as real estate accounts for 70% of Chinese household wealth and once contributed up to a quarter of the country’s economy. Consumers, wary of the property market’s instability, have cut back on spending, negatively impacting businesses dependent on robust domestic demand. For example, eyewear maker EssilorLuxottica, which produces Ray-Ban and Oakley brands, reported missing revenue targets in Q3 due to weak Chinese consumer demand.

Further compounding worries, new home prices in China fell at the fastest rate since 2015 in September, indicating that the property market remains in crisis despite multiple rounds of policy support over the past year. Additionally, China’s crude steel output fell for the fourth consecutive month, reflecting sluggish demand for construction materials.

While the export sector has been a rare bright spot for China’s economy, growth in exports slowed sharply in September, raising concerns about the sector’s future performance.

DEFLATIONARY PRESSURES AND POLICY RESPONSE

Following the release of the Q3 data, China’s stock markets were volatile but eventually rallied. The blue-chip CSI300 Index rose by 2.5%, and the Shanghai Composite gained 2.0%, boosted by new central bank funding schemes aimed at supporting the equity market. However, some economists believe China is grappling with deflationary pressures, which have persisted since early 2023. Toru Nishihama, Chief Economist at Dai-Ichi Life Research Institute, warned that China faces excess supply and weak demand, suggesting the country may fall into full-fledged deflation.

Policymakers have pledged to shift from relying on infrastructure and manufacturing investments to focus on stimulating domestic consumption. The central bank rolled out aggressive monetary support in late September, the most substantial measures since the COVID-19 pandemic, to bolster the property and stock markets. However, markets remain skeptical, as details about the total size of the stimulus package and the government’s long-term growth strategy remain unclear.

China faces structural challenges, including overcapacity, high debt levels, and an ageing population. Nishihama stressed that while the government has introduced numerous stimulus measures, it has yet to address these fundamental problems, leaving markets uncertain about the future trajectory of China’s economic recovery.

 

China’s State Planner Announces Economic Boost but Holds Back on Major Stimulus

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During a highly anticipated press conference on Tuesday, Zheng Shanjie, chairman of China’s National Development and Reform Commission (NDRC), outlined a series of measures aimed at strengthening the country’s economy. Despite these efforts, there were no announcements of major new stimulus initiatives, dampening investor enthusiasm and causing the rally in Chinese markets to lose momentum.

One key announcement was the acceleration of special purpose bond issuance to local governments, intended to support regional economic growth. Zheng emphasized that the 1 trillion yuan in ultra-long special sovereign bonds had been fully allocated to local projects. He also pledged to continue issuing ultra-long special treasury bonds next year. In addition, the central government will release a 100 billion yuan investment plan for 2024 by the end of this month.

The press briefing came as mainland China’s markets reopened after the weeklong Golden Week holiday. While markets initially surged on the news, the lack of significant new stimulus caused gains to slow. The CSI 300 blue-chip index pared its rise to 5% after an early jump of over 10%, while the Shanghai Composite and SZSE Component indices also trimmed gains to 5% and 8%, respectively.

Limited Stimulus Falls Short of Investor Expectations

Although Zheng expressed confidence that China would meet its annual growth target, his comments on the property market and domestic spending lacked detailed financial commitments, leaving some investors disappointed. Yue Su, an economist at the Economist Intelligence Unit, noted that the absence of specific figures might not be a negative indicator, as China’s pro-growth policy stance remains unchanged. Su maintained her forecast of 4.7% growth for China in 2023, with a slight uptick to 4.8% in 2025.

Shaun Rein, managing director at China Market Research Group, commented that many Western investors might take a cautious approach following the announcement. He added that without concrete fiscal stimulus, the recent rally in Chinese markets could be short-lived.

Economic Struggles Persist

China has been grappling with a sluggish economy following a disappointing recovery from COVID-19 lockdowns. Growth in the world’s second-largest economy has been hindered by weak domestic demand and a prolonged downturn in the property sector.

In the first half of 2023, China’s economy grew by 5%, meeting government targets. However, in the second quarter, growth slowed to 4.7%, marking the slowest pace since the first quarter of 2023. Inflation data has also been lackluster, with consumer prices rising by just 0.6% year-on-year in August, missing expectations. Factory activity contracted for the fifth consecutive month in September, with the official Purchasing Managers’ Index (PMI) recording 49.8, signaling continued contraction in the manufacturing sector.

Zheng acknowledged that China still faces significant challenges in achieving its growth objectives. Earlier in the year, he had emphasized the importance of coordinated macroeconomic policies, including fiscal, monetary, employment, and industrial measures, as the country continues to adjust its economic strategies.

While Beijing has introduced several stimulus measures aimed at halting falling property prices and bolstering economic performance, these actions have yet to fully reverse the slowdown. Investors remain cautious, awaiting further fiscal support from the government to reinvigorate the economy.