UK economy shrinks in Q3, raising risk of recession

THE UK economy shrank in the third quarter, raising the possibility that Britain is already in a recession. 

Revised figures on Friday (Dec 22) showed gross domestic product (GDP) dropped 0.1 per cent from Q2, a downgrade from the zero growth initially estimated. Economists had expected the second estimate to be unchanged.

The Office for National Statistics also downgraded its GDP figure for Q2, saying there was no growth compared to the 0.2 per cent expansion in output previously estimated.

The revision to Q3 puts the UK at risk of a technical recession – two quarters of falling GDP – or an even longer slump.

Output fell 0.3 per cent in October on a month-on-month basis, putting the economy on track to shrink in Q4 unless it manages to recover lost ground in November and December.

Currently, private-sector economists and the Bank of England (BOE) expect GDP to be flat this quarter, capping off a lacklustre year for the UK economy.

The figures could increase the pressure on the BOE to pivot to interest rate cuts sooner, as momentum in the economy dwindles. Last week, governor Andrew Bailey insisted that “there is still some way to go” in the fight against inflation, even as evidence grows of the impact rate rises are having on the economy. 

The UK has managed to narrowly avoid a recession in recent years, despite the worst cost-of-living crisis in generations and pain caused by the surge in interest rates. However, lower-than-expected inflation and growing market expectations of the BOE shifting to cuts as soon as May could help to support the economy in 2024. 

There was better news on retail sales, which rose a stronger-than-forecast 1.3 per cent in November from October, separate data showed.

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Britain’s finance minister Jeremy Hunt said the medium-term outlook for the country’s economy was more optimistic than data released on Friday suggested.

“We’ve seen inflation fall again this week, and the Office for Budget Responsibility expects the measures in the Autumn Statement, including the largest business tax cut in modern British history and tax cuts for 29 million working people, will deliver the largest boost to potential growth on record,” he said. BLOOMBERG