UK economy shrinks 0.2% as recession looms

Slump for July to September shows there is a 'tough road ahead', says Chancellor Jeremy Hunt

Shoppers on Oxford Street in London. The retail sector has fared badly. Getty Images
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The UK economy shrank 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 per cent between July and September.

The fall was even sharper in September alone, at 0.6 per cent, 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.

The Bank of England said last week that Britain's economy was set to enter a two-year recession if interest rates rose as much as investors had been pricing.

Even without further rate increases, the economy will shrink in five of the six quarters until the end of 2023, it said.

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

He said that he will be working to make a possible recession "shallower and quicker" in his budget. But this will include painful public spending cuts and tax hikes.

Speaking on Friday, following the release of the latest Office for National Statistics data, Mr 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.”

ONS director of economic statistics Darren Morgan told Radio 4's Today programme it was difficult to disentangle the bank holiday impact from other factors affecting the economy at the moment, but “at least half of that 0.6 per cent fall, and I stress estimate, was due to that bank holiday”.

“So fewer working days certainly had an impact.”

Looking more broadly at the economy over the quarter, Mr Morgan said the quarterly fall was driven by manufacturing.

“It's been having a really tough time. We saw widespread declines, with output falling in every subsector between July and September. And we didn't even see that at the height of the pandemic. Indeed, you have to go back to 1980, so over 40 years ago, for the last time that happened,” he told Radio 4.

Services were flat overall, but consumer-facing industries fared badly, with a notable fall in retail, he added.

Alice Haine, personal finance analyst at investment platform Bestinvest, said a contracting economy was “to be expected” when you consider the many headwinds battering the economy — from the war in Ukraine to persistently high prices and rapidly rising interest rates.

“With inflation at a 40-year-high of 10.1 per cent in September and expected to peak at around 11 per cent in the fourth quarter, many households and businesses had little choice — either they drastically reduce expenditure or risk falling into financial difficulty,” she said.

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

“For households already struggling financially, the possibility of losing their job adds another level of fear to their financial security,” added Ms Haine.

The figures came after earlier data from the ONS showed the UK’s economy unexpectedly shrank by 0.3 per cent in August.

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

Experts had been expecting economic growth to flatline in August.

Updated: November 11, 2022, 9:52 AM