U.K. Economy Stagnates as High Interest Rates Take Toll

Deeper Into the Numbers: Housing drags as higher rates hit.

After proving unexpectedly resilient this year despite the rising cost of living, the British economy has weakened notably. The services sector contracted last quarter as the highest interest rates since 2008 have weighed on the housing industry.

The manufacturing industry also slumped, while repairs helped offset the decline in new work in the construction sector.

According to the statistics agency’s breakdown of G.D.P. by month, the economy grew 0.2 percent in September, slightly more than in August, which came after a 0.6 percent decline in July.

International Comparisons: A stagnant Europe and strong United States.

Britain’s weak economy mirrors the stagnation in Europe, where eurozone economies contracted 0.1 percent in the third quarter. Germany, the bloc’s largest economy, has barely avoided a recession as businesses have been hit by high energy prices and weak demand for industrial goods. Across the region, high interest rates intended to drive down inflation are weakening economic activity, with demand for loans dropping and consumer spending slowing.

This contrasts with the United States, where the economy is growing strongly and defying expectations for a slowdown prompted by high interest rates. Instead, slowing inflation and a resilient labor market have bolstered consumers’ confidence to spend.

The Outlook: No growth — but no recession.

The British economy is not expected to sink into a recession, according to the Bank of England, but it will only avoid this distinction by a whisker. The central bank forecasts G.D.P. to increase just 0.1 percent in the last three months of the year and then to flatline throughout 2024 and the beginning of 2025.

This weak outlook is driven by high interest rates, which are expected to have an increasingly heavy toll on the economy. So far, less than half of the full effect of higher rates has been felt, the central bank estimates, and policymakers expect the restraining effects to shift from the housing market into business investment and consumer spending.

Quotable: “Chugging along really slowly.”

Economists at the National Institute of Economic and Social Research, an independent research institute, said this week that they expected “sluggish” economic growth this year and next, but slightly stronger activity than the Bank of England foresees.

“The bottom line here is that the U.K. is almost flatlining, chugging along really slowly,” said Stephen Millard, a deputy director at the institute, “and the precise numbers are almost besides the point.” About five million people in lower income groups won’t see their living standards return to prepandemic levels until 2026, the institute forecasts.

What’s Next: The government introduces efforts to bolster the economy.

Jeremy Hunt, the chancellor of the Exchequer, will announce updates to the country’s budget later this month, which he said would focus on “how we get the economy growing healthily again” through private investment and encouraging more people back into work.

But Mr. Hunt is not expected to make any substantial changes to taxes or spending because of the constraints imposed by another of his priorities: reducing the national debt as a share of G.D.P.

Even if it looks like the nation’s public finances are in better shape than expected, most analysts expect Mr. Hunt to wait until closer to the next election, which must be held by January 2025, to offer fiscal sweeteners. But economists at the National Institute of Economic and Social Research have urged the government to significantly and urgently increase public investment, particularly in infrastructure and housing.