UK economy shrinks 0.2% as recession looms

Britain’s economy contracted in the third quarter, potentially marking the start of what could be its longest recession on record.

Official figures show the UK economy contracted by 0.2% between July and September.

The fall was even steeper in September alone, at 0.6%, partly due to the effect of the bank holiday for Queen Elizabeth II’s funeral, when many businesses closed or operated differently on the day.

“But to achieve long-term sustainable growth, we need to control inflation, balance the books and reduce debt. There is no other way.”

ONS director of economic statistics Darren Morgan told Radio 4’s Today program that it was difficult to separate the impact of the public holidays from other factors affecting the economy at the moment, but ‘at the minus half of that 0.6% drop, and I stress the estimate, was due to that holiday.”

“So fewer working days definitely had an impact.”

Looking more broadly at the economy during the quarter, Morgan said the quarterly decline was driven by manufacturing.

“It was a really tough time. We saw broad-based declines, with production declining across all sub-sectors between July and September. And we didn’t even see it at the height of the pandemic. Indeed, you have to go back to 1980, so more than 40 years ago, for the last time this happened,” he told Radio 4.

Services held steady overall, but consumer-facing industries fared poorly, with retail trade down noticeably, he added.

Alice Haine, personal finance analyst at investment platform Bestinvest, said a shrinking economy was “to be expected” considering the many headwinds battering the economy – from war in Ukraine to prices constantly high and rapidly rising interest rates.

“With inflation at a 40-year high of 10.1% in September and expected to peak at around 11% in the fourth quarter, many households and businesses had little choice – either cut spending drastically or were in danger of falling into financial difficulties,” she said.

“The road here, however, is littered with potholes, despite most [former chancellor Kwasi] Kwarteng’s tax cuts are now consigned to the history books.

“For households already in financial difficulty, the possibility of losing their jobs adds another level of fear to their financial security,” Ms Haine added.

The figures came after earlier data from the ONS showed the UK economy unexpectedly contracted by 0.3% in August.

The decline in gross domestic product followed growth of 0.1% in July 2022, according to ONS data. The July figure was revised down from 0.2%.

Experts expected economic growth to stagnate in August.

The Bank of England said last week that Britain’s economy was on the verge of entering a two-year recession if interest rates rose as much as investors had expected.

Even without further rate increases, the economy will contract in five of the six quarters through the end of 2023, he said.

UK Chancellor Jeremy Hunt will reveal how the UK plans to plug a £60billion hole in Britain’s finances on November 17, with the release of the autumn statement, which he called one of the “greatest responsibilities” of his political career.

He said he would work to make a possible recession “shallower and faster” in his budget. But that will include painful public spending cuts and tax hikes.

Speaking on Friday, following the release of the latest data from the Office for National Statistics, Mr Hunt said: ‘I am under no illusions that there is a difficult road ahead – a a path that will require extremely difficult decisions to restore confidence and economic stability.

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