The UK economy shrank by 0.3 per cent in March, while the Bank of England put its base rate up to 4.5 per cent this week – and both have big impacts on consumers.
Homeowners and borrowers face high loan costs, but it is good news for savers, and the UK has avoided falling into recession.
Falling gross domestic product is being driven by the struggling services sector, the Office for National Statistics said. Retailers are battling poor footfall due to bad weather and high inflation, which has put a dent in their sales.
The picture was slightly more positive over the three months to March 2023, which saw GDP growth of 0.1 per cent.
In a snapshot, ONS director of economic statistics Darren Morgan said: ‘Despite the launch of new number plates, cars sales were low by historic standards – continuing the trend seen since the start of the pandemic – with warehousing, distribution and retail also having a poor month.’
This is what it means for consumers – from homeowners to savers.
Perfect storm: Consumers are grappling with high inflation, as well as the knock-on consequence of rising base rate and the additional pressure of a slow economy
Higher mortgage and loan costs
The Bank of England put its base rate up from 4.25 per cent to 4.5 per cent in a bid to get a grip on inflation.
Rising base rate means it costs consumers more to borrow, from mortgages to loans.
This is because base rate is one of the criteria lenders use to set their prices.
Whether or not your mortgage or loan rate will go up as a result of this base rate hike depends on the type of deal you have.
Most tracker and variable rate loans move in line with base rate. Fixed-rate mortgages and loans will only change price at the end of their term.
Lenders maintain that the cost of new fixed-rate mortgages is not linked directly to base rate.
However, rising base rate does mean increasing swap rates – the level at which lenders lend to one another. And rising swap rates do directly affect the price of fixed-rate homeloans.
The average two-year fixed mortgage rate is now 5.26 per cent, with a five-year fix at 4.97 per cent, according to Moneyfacts. This time last year those mortgage rates were 3.03 per cent and 3.17 per cent respectively.
Almost three in five home loans coming up for renewal in 2023 are at rates below 2 per cent, according to ONS statistics, well below the current rates being offered by lenders despite the drop in prices since the start of the year.
But good news for savers
But the successive interest rate rises have been good news for savers. Savings accounts now offer some of the highest interest rates in recent years on deposits.
The interest paid on many easy access deals rises alongside base rate.
Five savings providers have already announced they are upping easy-access rates following the Bank of England’s base rate hike.
Savers looking for new fixed-rate bonds can also expect better rates, though those with existing bonds are locked in at their current interest level.
Households cut back on spending
Falling GDP means households are cutting back on their spending even further than they have due to the cost of living crisis.
Alice Haine, personal finance analyst at investment platform Bestinvest, said: ‘Falling output is worrying news for household finances as it signals the economy is not faring particularly well.
‘Businesses and consumers are constraining expenditure in the face of so much uncertainty – something that can lead to pay freezes and lost jobs.’
Losing a job at a time when the prices of food, energy and household bills are also sky-high could decimate the finances of those not adequately prepared.
Recession avoided
As it stands the UK has – narrowly – avoided falling into recession, defined as two consecutive quarters of falling GDP.
The UK is likely to avoid a recession this year, the Bank of England’s Monetary Policy Committee has said.
That is good news for consumers, as recessions normally cause higher unemployment and falling house prices.
Growth predictions, however, remain sluggish. The MPC thinks the economy will grow by 0.25 per cent this year, against predictions of a 0.5 per cent contraction announced in February. GDP is also now expected to rise by 0.75 per cent next year.
