UK economy grows 0.1% in November: what this means for household finances

Alice Haine, Personal Finance Analyst at Bestinvest, the DIY investment platform and coaching service, comments:

“The UK economy grew by a surprise 0.1% in November, slowing from a 0.5% uplift in October, raising hopes that a recession could be shallower than expected or avoided altogether despite soaring prices, falling consumer expenditure and persistent industrial action.

“While the November data is slightly more upbeat than expected, driven by people going out to pubs and restaurants to watch the FIFA World Cup games, output still contracted 0.3% in the three months to November.

“With the UK falling behind other advanced economies amid tearaway inflation driven by Putin’s invasion of Ukraine, rising interest rates, labour shortages and lingering supply chain pressures, the road ahead still appears bleak. The OECD expects the UK economy to shrink in 2023, while the Office for Budget Responsibility says the recession will last just over a year, with output shrinking 1.4% this year.

“There is optimism in the air, however. Oil and gas prices have eased back since their peaks and energy demand is on the decline thanks to the milder than expected winter. Energy bill forecasts have been slashed, offering some respite to businesses and consumers from the high prices of late and hopes that the recession could be shallower than feared.

“However, energy prices are still far higher than historic norms and with the shortage of workers affecting more than a quarter of UK businesses, due to large numbers of people becoming economically inactive – partly driven by high long-term sickness rates and huge NHS waiting lists, as well as an increase in early retirement – there are still plenty of challenges ahead.

“A slowing economy is never good news for household finances as it signals that companies are making less money and cutting investment – something that could see salaries fall and unemployment rise.

“For consumers still contending with much higher household bills, thanks to inflation lingering at a 40-year high of 10.7%, it’s no wonder many are cutting back as they also grapple with falling real incomes, a higher tax burden and much higher borrowing costs as well as the threat of job loss and falling property prices.

“The struggle is already evident with the Financial Conduct Authority warning that more than 750,000 households are at risk of defaulting on their mortgages over the next two years as escalating borrowing costs make repayments unsustainable. With 200,000 households already behind on their payments as of the end of June last year and some borrowers thousands of pounds behind – the situation is likely to worsen.

"More than 800,000 households - currently locked into mortgages at rates below 2%, - are facing a steep increase when their deal expires this year. Forced property sales will only propel the falling house price scenario further coming at time when living standards have already been squeezed to the max.

"With further interest rate rises on the way despite the threat of recession as the central bank strives to keep a lid on inflation, the key to survival for those already struggling is to slash expenditure, draw up a budget and do everything they can to live within their means.

“One of the best ways to cut short-term money stress is to build up an emergency fund. Even those with no funds in reserve should prioritise setting aside a small sum each month to slowly build up an amount that can cover up to six to 12 months’ worth of expenses. This fund would be invaluable should the worst happen - they lose their job as employers embark on cost-cutting measures.

"While trimming back any unnecessary spending will be key for protecting personal finances, long-term investments should not be neglected either as finances need to remain robust not only during difficult economic times but long after they are over.

“With a growing number of people set to become subject to higher tax bands, investing in a pension is one of the best ways to reduce an income tax liability.  A record 5.5 million people are expected to pay income tax at the 40% band this year, a number likely to rise further under the planned freeze in thresholds until 2028.

“With inflation expected to halve by the end of this year, interest rates set to peak at a slightly lower level than feared of 4.5% and mortgage rates easing from their October highs, the worst of the cost-of-living crisis may be over. But the people who will emerge unscathed from the hit to living standards will be those that managed to slash their outgoings and boost their savings despite the raft of financial headwinds.”