UK economy unexpectedly shrinks 0.3 per cent in August

Both production and services fell back as challenges to the economy took their toll on output

Union flags in London. The latest data means the British economy is on track to contract overall in the third quarter. EPA

The UK’s economy unexpectedly shrank by 0.3 per cent in August, official figures show.

The decline in gross domestic product comes after growth of 0.1 per cent in July 2022, according to data from the Office for National Statistics. July's figure was revised down from 0.2 per cent.

Experts had been expecting economic growth to flatline in August.

The latest data means the economy is on track to contract overall in the third quarter, with growth of more than 1 per cent in September needed to prevent a quarterly decline.

“Countries around the world are facing challenges right now, particularly as a result of high energy prices driven by [Russian President Vladimir] Putin's barbaric action in Ukraine,” Chancellor Kwasi Kwarteng said.

“That is why this government acted quickly to put in place a comprehensive plan to protect families and businesses from soaring energy bills this winter.

“Our growth plan will address the challenges that we face with ambitious supply-side reforms and tax cuts, which will grow our economy, create more well-paid skilled jobs and, in turn, raise living standards for everyone.”

Grant Fitzner, chief economist of the ONS, said the economy shrank in August, with “both production and services falling back, and with a small downward revision to July's growth, the economy contracted in the last three months as a whole”.

Samuel Tombs, at Pantheon Macroeconomics, said figures show the UK is "a big step" closer to a recession.

“We look for a 0.5 per cent quarter-on-quarter drop in GDP in the fourth quarter, building on a similar decline in the third quarter, and a 1.5 per cent year-over-year decline in 2023 as a whole," he said.

He warned the recession may not end until late 2023 at the earliest.

“Around one-third of households no longer have meaningful savings left, and the 30 per cent that have a mortgage reduce expenditure in response to, or in advance of, a sharp rise in their monthly loan payments," added Mr Tombs.

“In addition, the deterioration in businesses’ borrowing costs is consistent on past form with both investment and employment falling next year.”

Martin Beck, chief economic adviser to the EY Item Club, said the UK was on course for a “substantial fall” in GDP overall in the third quarter.

He said: “The EY Item Club expects a large month-on-month fall in GDP in September due, in part, to the extra bank holiday.

"The impact of this holiday is likely to have been larger than in June – when there was also an additional bank holiday – because many firms in the retail and hospitality sectors that remained open in June opted to close in September.”

He said while the economy may see a “mechanical rebound” in the fourth quarter, this will mask a poor underlying performance.

“High inflation continues to eat into household spending power while the recent tightening in financial conditions could well add to the real income squeeze and potentially cause a house price correction,” he cautioned.

Alice Haine, personal finance Analyst at DIY investment platform Bestinvest, said a shrinking economy in August was always on the cards when you consider the many challenges the country was facing.

They included the continuing fallout from the war in Ukraine, soaring food and energy prices and rising borrowing costs, which took their toll on output.

“With inflation at a 40-year-high of 9.9 per cent in August and the prospect of even higher energy costs at the time, households and businesses had little choice but to rein in expenditure.

“The decline in output of 0.3 per cent was largely driven by falls in the production and services sectors, which had enjoyed a bumper July filled with major sporting events — a reflection of a rapidly shifting economy as Britain readied itself for a difficult winter with sky-high energy costs and a deepening cost-of-living crisis.”