UK economy shrinks in third quarter as recession looms

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Britain’s economy contracted 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 expected to be a prolonged recession.

Gross domestic product, or GDP, fell 0.6% between August and September, the Office for National Statistics said on Friday, a bigger drop than the 0.4% forecast by economists polled by Reuters.

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

The economy is now 0.2% lower than in February 2020, before the pandemic.

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

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However, Sanjay Raja, an economist at Deutsche Bank, said the contraction in GDP 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 two-year long recession, reflecting tighter financial conditions and pressure on real incomes from rising prices.

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

The latest figures give pause for thought for next week’s autumn statement that Chancellor Jeremy Hunt is expected to tighten fiscal policy even though the economy may already be in recession.

James Smith, research director at the Resolution Foundation think tank, said the Chancellor ‘should strike a balance between putting public finances on a sustainable footing, without further deepening the cost of living crisis, or hitting public services already solicited”. .

Commenting on the GDP data, Hunt said: “I’m under no illusions that there’s a tough road ahead.”

Quarterly figures from the UK contrast with a 0.2% expansion in the Eurozone.

All major economies, including the United States, Germany and France, have now surpassed their pre-pandemic levels. Instead, in the three months to September, the UK economy was 0.4% lower than in the fourth quarter of 2019. The Bank of England expects the UK economy to be even more 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 once again slipped to the back of the G7 pack, “beset by more intense headwinds from fiscal and monetary policy, and substantial long-term supply-side damage from Covid and Brexit”.

In September, production in the service sector fell sharply by 0.8%, while manufacturing output stagnated and construction increased by 0.4%.

During the quarter, real household spending fell 0.5% and the production of consumer services fell 0.8%. Widespread declines were also seen in most manufacturing industries. Business investment fell 0.5% to 8% below pre-pandemic levels. Rising government spending and net trade, while imports fell, limited the quarterly decline.

UK goods exports fell 4.7% in September and were below pre-pandemic levels in the third quarter after adjusting for inflation.

Ana Boata, head of economic research at credit insurer Allianz Trade, said the UK’s export performance “is well below normal, reflecting the seismic change in the trading environment for companies in the post-Brexit and post-Covid era, rising interest rates and inflationary environment”.

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