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UK economy shrinks as economists warn of more pain to come

Gross domestic product fell by 0.2% between July and September

Britain’s economy shrank in the three months to September, official statistics said Friday, as forecasters warned of many months of contraction to come.

The Office for National Statistics said gross domestic product fell by 0.2 per cent between July and September, a smaller-than-expected contraction that nevertheless is seen to signal the start of a long recession.

GDP shrank by 0.6 per cent in September, and by 0.1 per cent in August, the statistics office said. It said a decline in manufacturing output and an extra holiday to mark the death of Queen Elizabeth II, which contributed to “a notable fall in retail,” were behind the decline.

It said the UK economy is now 0.2 per cent smaller than in February 2020, just before the Covid-19 pandemic shut down big chunks of the economy for months.

Britain’s economy, like that of many other countries, is struggling as Russia’s invasion of Ukraine has driven up food and energy costs, pushing consumer price inflation to 40-year highs.

The Bank of England hiked its main interest rate last week by three quarters of a percentage point, to 3 per cent — its biggest increase in three decades. The central bank said the move was needed to beat back stubbornly high inflation that is eroding living standards and is likely to trigger a “prolonged” recession.

The UK's finances worsened when then-Prime Minister Liz Truss announced a huge package of unfunded tax cuts on Sept. 23. The package alarmed financial markets, sent the pound to a record low against the dollar and forced the Bank of England to step in to stop the crisis from spreading.

Truss resigned less than a month later, leaving her successor, Prime Minister Rishi Sunak, and Treasury chief Jeremy Hunt to find billions in savings to shore up the nation’s finances.

Hunt is due to make an emergency budget statement next week that is expected to include both tax increases and public spending cuts. He said Friday’s figures showed that there would need to be “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.”

Nicholas Hyett, equity analyst at investment firm Wealth Club, said the economy’s third-quarter performance was “full of warning signs.”

“With consumers battening down the hatches for a tough winter and the government proposing substantial tax rises and spending cuts, we think the economy will shrink again” in the fourth quarter," he said.