UK economy shrinks in third quarter as recession looms
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The UK economy contracted during the third quarter as it shrank more than expected in September, suggesting the country has entered what is forecast to be a prolonged recession.
Gross domestic product fell 0.6 per cent between August and September, the Office for National Statistics said on Friday, a larger drop than the 0.4 per cent forecast by economists polled by Reuters.
Output fell 0.2 per cent between the second and third quarters, the first such contraction in more than a year. Economists had expected shrinkage of 0.5 per cent.
The UK economy is now 0.2 per cent smaller than in February 2020, immediately prior to the Covid pandemic. Other major economies — including the US, Germany and France — have grown above pre-pandemic levels.
Sanjay Raja, economist at Deutsche Bank, said the UK GDP contraction in the third quarter was the result of “continued weakness in household and business confidence, higher inflation and higher interest rates in the economy”.
The Bank of England last week forecast that the third quarter would be the start of a long recession lasting up to two years, as the central bank raises interest rates to curb high inflation.
The latest GDP figures provide a difficult backdrop to next week’s Autumn Statement in which the chancellor Jeremy Hunt is expected to tighten fiscal policy despite the economic downturn.
He is considering tax rises and public spending cuts worth up to £55bn a year to try to fill a gaping hole in the public finances and restore financial markets’ confidence in the UK after Liz Truss’s ill-fated premiership.
Her “mini”-Budget involved £45bn of unfunded tax cuts, most of which Hunt has pledged to reverse after Truss’s plans roiled the markets.
Hunt said: “I am under no illusion that there is a tough road ahead — one which will require extremely difficult decisions to restore confidence and economic stability.
“But to achieve long-term, sustainable growth, we need to grip inflation, balance the books and get debt falling. There is no other way.”
Labour accused the Conservatives of mismanaging the economy. “Britain’s unique exposure to economic shocks has been down to a Conservative-led decade of weak growth, low productivity and under-investment and widening inequality,” said shadow chancellor Rachel Reeves.
James Smith, research director at the think-tank Resolution Foundation, said Hunt would “need to strike a balance between putting the public finances on a sustainable footing, without making the cost of living crisis even worse, or hitting already stretched public services”.
About half of September’s fall in GDP reflected the extra bank holiday for Queen Elizabeth’s funeral, according to the ONS.
In September, output in the services sector dropped 0.8 per cent, while manufacturing stagnated.
In the third quarter, household expenditure fell 0.5 per cent in real terms and output in consumer-facing services declined 0.8 per cent.
The third quarter contraction was not as bad as economists had expected because the ONS revised up the GDP figures for July and August.
Samuel Tombs, economist at Pantheon Macroeconomics, said the UK economy had slipped to the back of the G7 pack again, “beset by more intense headwinds from fiscal and monetary policy, and substantial long-term supply-side damage from Covid and Brexit”.
UK goods exports fell 4.7 per cent in September and were below pre-pandemic levels in the third quarter after adjusting for inflation.
Ana Boata, head of economic research at the credit insurer Allianz Trade, said the UK’s export performance “is well below par, reflecting the seismic shift in the trading environment for businesses in the post-Brexit and post-Covid era, rising interest rates and the inflationary environment”.
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