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The UK economy had a better than expected end to 2023, according to closely watched indicators that showed a strong improvement in services activity and a rebound in mortgage approvals.
Figures published on Thursday helped alleviate fears that the UK economy could contract in the final three months of 2023 after a 0.1 per cent fall in the third quarter and a 0.3 per cent month-on-month decline in October.
Net mortgage approvals for house purchases rose to 50,100 in November from 47,900 in October, according to the Bank of England. The figure was higher than the 48,500 forecast by economists polled by Reuters.
The final S&P Global UK services PMI business activity index rose to 53.4 in December, up from 50.9 in November and well above the 52.7 figure in previous flash estimates.
BoE data also showed a strong growth in consumer credit, which rose to £2.0bn in November, up from £1.4bn in the previous month, and a drop in the inflation rate expected by businesses for the year ahead.
Tomasz Wieladek, chief European economist at the investment company T Rowe Price, said the figures “imply a large rebound in UK domestic demand in December” and “clearly raise the prospect that the economy didn’t contract again in Q4”.
Thomas Pugh, economist at leading audit, tax and consulting firm RSM UK, said the credit growth “should support a rebound in economic growth in November and December, after a dismal October, that could prove to be enough to avoid slipping into recession in the second half of last year”.
The mortgage approvals figure was the highest since June but remained 24 per cent below the level in November 2019, before the pandemic, reflecting the rise in the BoE’s benchmark rate to the current 5.25 per cent.
Mortgage approvals have been rising in recent months as markets reassess their interest rate expectations following lower than expected inflation in October and November, shaping the rates offered by lenders.
The two-year fixed mortgage rates with 60 per cent loan-to-value eased from 6.2 per cent in July to 5.1 per cent in November, the BoE said, while rates on popular five-year deals have also declined since the summer.
Harps Garcha, director at Slough-based broker Brooklyns Financial, said: “Lower mortgage rates, falling inflation and the prospect of a cut to the base rate sooner rather than later, are driving demand and boosting confidence among buyers.”
The services number came ahead of official statistics for November’s gross domestic output, which are due to be published next week.
Markets are pricing that the Bank of England will start cutting interest rates from the spring, taking the policy rate to 3.75 per cent by the end of the year.
Businesses interviewed by the BoE in December said they expected output price inflation for the year ahead to be 4.2 per cent, down from 4.3 per cent in November and well below the 6.7 per cent reported in June 2022.
The fall in interest rate expectations was behind the strong services PMI reading, said Tim Moore, economics director at S&P Global Market Intelligence, which compiles the survey.
“The recovery in client demand was attributed to hopes of lower borrowing costs and an improving global economic backdrop in 2024,” he said.