GDP shrinks in third quarter as recession fears rise

GDP shrinks in third quarter as recession fears rise

The UK economy shrank in the third quarter of the year, raising concerns about an incoming recession.

Figures released today (November 11) by the Office for National Statistics show gross domestic product fell 0.6 per cent in September, meaning output in the third quarter of the year fell by 0.2 per cent.

The economy is now 0.2 per cent smaller than at pre-pandemic levels.

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Services fell 0.8 per cent in September after growing in August, with output in consumer-facing services falling by 1.7 per cent.

This was slightly offset by production, which grew by 0.2 per cent in September.

The additional bank holiday in September for the Queen’s funeral contributed to the overall estimates.

Because it was a one-off event, its impact was not removed from estimates, and the ONS said the closure of businesses around the country on that day contributed to at least half of the month’s fall in GDP.

Looming recession

The figures have increased the likelihood that the UK is heading into recession, which is defined as two consecutive quarters of the economy shrinking.

Were it not for the disruption caused by the extra bank holiday the UK may have “scraped” a positive performance in the third quarter, but the ONS’s statement is “full of warning signs”, said Nicholas Hyett, equity analyst at Wealth Club.

“Inflation is squeezing consumer spending, inward investment has fallen and supply constraints are restricting activity in the manufacturing and construction sectors,” he said. 

“The mini-budget turmoil only kicked in right at the end of the period - and that is likely to have left Q4 off to a poor start.”

Hyett said the UK is likely to shrink again in the fourth quarter as consumers batten down the hatches for a tough winter. 

“With the Bank of England predicting recession could stretch well into late 2023 or even beyond, the Queen's funeral may end up marking the start of an "annus horribilis" for the whole of the UK." 

The Bank of England warned last week that the UK could be facing its longest recession.

The economic outlook is daunting for small businesses, said mortgage broker at Henchurch Lane Financial Services, Paul Holland.

“The challenges we face going forward into 2023 are dealing with lots of difficult discussions when people come to the end of their very competitive fixed rates, along with reduced levels of new enquiries.”

The news will increase the pressure on chancellor Jeremy Hunt ahead of the Autumn Statement on November 17. 

In the third budget of the year, Hunt is expected to announce between £40bn and £55bn in spending cuts and tax raises.