The UK is on the brink of recession after the economy shrank by 0.2% in the third quarter
The Bank of England has warned that the UK is facing its longest recession since records began a century ago.
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LONDON — Great Britain’s economy shrank by 0.2% in the third quarter of 2022, signaling what could be the start of a long recession.
A preliminary assessment shows that the economy performed better than expected in the third quarter, despite the decline. Economists had forecast a contraction of 0.5%, according to Refinitiv.
The contraction does not yet represent a technical recession — characterized by two consecutive quarters of negative growth — after the 0.1% contraction in the second quarter was revised to a 0.2% increase.
“In terms of output, there was a slowdown in the quarter for the service, manufacturing and construction industries; the services sector slowed to flat output in the quarter driven by a decline in consumer-focused services, while the manufacturing sector fell by 1.5% in the third quarter of 2022, including declines in all 13 sub-sectors of the manufacturing sector,” the Office for National Statistics reported. on Friday.
The Bank of England forecast for last week the nation’s longest recession since records begansuggesting that the decline that began in the third quarter is likely to last well into 2024 and lead to unemployment rising to 6.5% over the next two years.
The country is facing a historic cost-of-living crisis, fueled by pressure on real incomes from rising energy and commodity prices. The central bank recently imposed its own the largest increase in interest rates since 1989 as policymakers try to tame double-digit inflation.
The ONS said the level of quarterly GDP in the third quarter was 0.4% below the pre-Covid level in the final quarter of 2019. Meanwhile, figures for September, during which UK GDP fell by 0.6%, were impacted by the government holiday for the state funeral of Queen Elizabeth II.
British Chancellor of the Exchequer Jeremy Hunt will announce a new fiscal policy plan next week, which is expected to include significant tax increases and spending cuts. Prime Minister Rishi Sunak has warned that “difficult decisions” will need to be made to stabilize the country’s economy.
“While some inflation data may start to look better from now on, we expect prices to remain elevated for some time, adding further pressures on demand,” said George Lagarias, chief economist at Mazars.
“If next week’s budget turns out to be really ‘tough’ on the taxpayer, as expected, spending is likely to be further suppressed and the Bank of England should start thinking about the impact of the demand shock on the economy.”
Dutch bank ING sees a cumulative hit to UK GDP of 2% by mid-2023, which would be comparable to the country’s 1990s recession.
ING developed markets economist James Smith said the bank expects economic activity to contract 0.3% in the fourth quarter as consumer spending falls, which would reinforce a technical recession.
“As winter progresses, we also expect increased workloads in manufacturing and construction – both of these sectors suffered significantly during the recessions of the 1990s and 2008,” Smith said.
“A decline in new order output, coupled with a drop in global consumer demand for goods and rising inventory levels, as well as higher energy costs, point to lower output through early 2023. Likewise, a sharp rise in mortgage rates and very early signs of falling home prices to weaker construction activity over the next year.”
ING expects the Bank of England interest rate to peak around 4%, but Smith noted that much would depend on next week’s fiscal announcements.
“It is understandable that a big focus will be on how the chancellor will close the projected fiscal deficit in 2026/27. “But above all, we will be looking for details on how the government will make its energy support less generous from April, something that has the most room to reshape the outlook for 2023,” he said.
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