The UK economy contracted in the third quarter, signaling the start of a recession that is likely to affect Europe next.
Britain’s GDP fell by 0.2% between July and September, ending five consecutive quarters of growth, the Office for National Statistics said on Friday.
The UK is the only G7 economy to have contracted in the third quarter and is now 0.4% smaller than at the end of 2019, before the coronavirus pandemic began, according to the ONS.
“The quarterly decline was driven by manufacturing, which saw broad-based declines across most industries. Services were broadly flat, but consumer-facing industries fared poorly, with a notable decline in retail trade” , ONS director of economic statistics Darren Morgan said in a statement.
The extra bank holiday for Queen Elizabeth II’s funeral on September 19 also played a role, with some businesses closing or adjusting their operations that day, the ONS said. GDP fell by 0.6% in September.
However, the fall in GDP reflects a slowdown in the overall economy. Household incomes are being squeezed by decades of high inflation, interest rates are rising and business and consumer confidence is weakening.
“Weaker appetite for consumer spending is likely to help propel GDP to a second straight contraction in the fourth quarter,” James Smith, developed markets economist at ING, said in a note on Friday.
The Bank of England warned last week that the UK economy could be in its longest recession since the 1940s. And the contraction in the third quarter contrasts with expansion of 0.2% in France and Germany, and growth of 0.5% in Italy.
But the landscape in Europe is also changing.
The European Commission warned on Friday that high inflation and rising interest rates will likely push the euro zone into recession in the fourth quarter. He now expects inflation to peak at the end of the year at a rate of 8.5%.
“As inflation continues to reduce household disposable income, the contraction in economic activity will continue in the first quarter of 2023,” the Commission said in a statement.
Even so, the Commission expects GDP growth in the euro area to remain positive next year and into 2024. In contrast, the Bank of England forecast last week that the third quarter would be start of a two-year recession in the UK.
That would be the longest since World War II and dwarfing the recession that followed the 2008 global financial crisis, although the central bank said any fall in GDP heading into 2024 was likely to be relatively small.
Friday’s GDP figures “solidify the picture that the economy is moving towards recession, if not already into one,” David Bharier, head of research at the British Chamber of Commerce, said in a statement.
Weak economic growth is piling pressure on the UK government as it tries to restore credibility with investors after a fall in the pound and a crash in the bond market in September, triggered by former prime minister Liz Truss’ plan to reduce taxes while increasing spending and debt.
Chancellor of the Exchequer Jeremy Hunt reversed most of his plans in his first days in the job. and is expected to announce steep tax hikes and spending cuts next week to try to reduce the medium-term debt.
In response to the latest GDP figures, Hunt said: “I am under no illusions that there is a difficult road ahead, which will require extremely difficult decisions to restore confidence and economic stability. But to achieve growth sustainable in the long term, we have to control inflation, balance the accounts and get the debt down. There is no other way.”