Wednesday, June 7, 2023

UK economy shrinks in third quarter as recession looms

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The UK economy shrank more than expected in September and contracted in the third quarter for the first time since the start of last year, suggesting the country has entered what is forecast to be a prolonged recession.

Gross domestic product, or GDP, 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.

With the economy also contracting in August, output fell 0.2 per cent between the second and third quarter, the first quarterly contraction in more than a year.

The economy is now 0.2 per cent smaller than in February 2020, before the pandemic.

About half of September’s fall reflects the extra bank holiday for Queen Elizabeth II’s funeral, according to the ONS.

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However, Sanjay Raja, economist at Deutsche Bank, said the 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 forecast in September that the third quarter would be the start of a long recession lasting for two years, reflecting tighter financial conditions and the squeeze on real incomes from higher prices.

The Queen’s funeral “may end up marking the start of an ‘annus horribilis’ for the whole of the UK”’ said Nicholas Hyett, equity analyst, at the financial company Wealth Club.

The latest figures provide a sobering backdrop to next week’s Autumn Statement in which the chancellor Jeremy Hunt is expected to tighten fiscal policy even though the economy could already be in recession.

James Smith, research director at the think-tank Resolution Foundation, said the chancellor 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”.

Commenting on the GDP data, Hunt said: “I am under no illusion that there is a tough road ahead.”

The UK quarterly figures contrast with a 0.2 per cent expansion in the eurozone.

All the major economies, including the US, Germany and France, have now grown above their pre-pandemic levels. Instead, in the three months to September, the UK economy was 0.4 per cent smaller than in the fourth quarter of 2019. The Bank of England expects that the UK economy will still be smaller than before the pandemic by at least the end of 2025.

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Samuel Tombs, chief UK 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”.

In September, output in the services sector fell sharply by 0.8 per cent while manufacturing production stagnated and construction was up 0.4 per cent.

In the quarter, real household expenditure fell 0.5 per cent and output in consumer-facing services fell 0.8 per cent. There were also widespread declines across most manufacturing industries. Business investment fell 0.5 per cent to 8 per cent below pre-pandemic levels. Rising government spending and net trade, as imports fell, limited the quarterly fall.

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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