UK economy rallies in October but recession still expected: what this means for household finances

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

“The UK economy returned to growth in October, rising 0.5% compared to September when output was affected by the bank holiday for the state funeral of the Queen.

“While the October data is slightly more upbeat than expected with the economy now 0.4% above its pre-pandemic level, output contracted 0.3% in the three months to October, confirming what most of us already know – the country is still on track for a recession.

“A recession will only add more pressure on household finances, stretched to the max by tearaway inflation, high mortgage costs and falling real incomes. Many have already slashed their spending in a bid to balance the books, something evident in the 0.5% drop in household consumption seen in the third quarter.

“October was an ultra-challenging month for the economy as the fallout from former Chancellor Kwasi Kwarteng’s unfunded tax cuts, made in the absence of forecasts, caused chaos in the bond markets and a surge in borrowing costs.

“While the political and financial environment later stabilised under a new Government, mortgage rates are still significantly higher than they were in the summer with the Autumn Statement delivering further pain with the highest tax burden since the Second World War.

“A contracting economy is never good news for personal finances. A country in recession indicates that the economy is performing poorly with companies likely to make less money, unemployment rising and graduates and school leavers finding it harder to find work.

“While Liz Truss’s energy price guarantee meant households were shielded from an 80% jump in energy bills on October 1, inflation at a 41-year high of 11.1% and the huge jump in mortgage costs left households with little option – either they cut their spending or face financial difficulties.

“Unemployment may be at the lowest level since the mid-1970s, but the BoE expects it to nearly double by 2025 – an outlook that only amplifies financial insecurity for households already contending with rising costs.

“With much colder temperatures now here and the economy facing weeks of industrial action, the run-up to Christmas is looking extremely bleak. Food inflation rose by 16.4% in the 12 months to October, with families set for a much more constrained festive period than the pre-pandemic era.

“Cutbacks at Christmas will be crucial for households whose budgets are already squeezed to the max. But while trimming back any unnecessary frivolity will ease the financial squeeze, savings and long-term investments should not be neglected as finances need to remain robust not just for the next year or two but long after this recession is over.

“With inflation expected to top out in the fourth quarter of this year and halve by the end of next, interest rates set to peak at a slightly lower level than feared of 4.5% in the Spring and borrowing costs potentially on the retreat, households might hope for some respite in the new year. But with a long recession on the cards and energy costs jumping in April, the financial challenges are here to stay for now.”