Britain’s economy shrinks at the start of a long, dreaded recession

LONDON (Reuters) – Britain’s economy contracted in the three months to September at the start of what is likely to be a prolonged recession, underscoring the challenge facing Britain’s Chancellor of the Exchequer Jeremy Hunt as he prepares to raise taxes and cut spending next week.

Official data released on Friday showed that economic output shrank by 0.2 percent in the third quarter, less than the 0.5 percent contraction expected by analysts in a Reuters poll.

But it was the first drop in gross domestic product since the start of 2021, when Britain was still under severe coronavirus restrictions, as households and businesses grappled with a severe cost-of-living crisis.

The UK economy is now down from its pre-pandemic size – it is the only G7 economy that has not fully recovered from the COVID recession – and is smaller than it was three years ago on a quarterly basis.

Resolution Research said that although the decline was less than investors had feared, it left Britain on track for a faster return to recession since the mid-1970s.

Director of Research James Smith said the numbers provided a sobering backdrop to Hunt’s budget announcement on November 17, when he will try to convince investors that Britain can reform its public finances – and its credibility in economic policy – shortly after Liz Truss’s presidency as prime minister. .

“The chancellor will need to strike a balance between putting public finances on a sustainable footing, without making the cost-of-living crisis worse, or hurting already depleted public services,” Smith said.

In response to the data, Hunt reiterated his warnings that tough decisions should be made about taxes and spending.

“I am under no illusion that there is a difficult path ahead – one that will require very difficult decisions to restore confidence and economic stability,” Hunt said in a statement.

“But to achieve sustainable long-term growth, we need to control inflation, balance the books, and reduce debt,” he added. “There is no other way.”

The reality of the recession

The Bank of England said last week that the British economy is on the cusp of a two-year recession if interest rates rise as much as investors have been seeking.

Even without further price increases, she said, the economy would contract in five of the six quarters through to the end of 2023.

“Recession fears are turning into reality,” said Soren Theroux, director of economics at the Institute of Chartered Accountants in England and Wales.

“This drop in production is the beginning of a punitive period with rising inflation, energy bills, interest rates and incomes, pushing us into a technical recession from the end of this year.”

The Office for National Statistics said that in September alone, when Queen Elizabeth’s funeral was marked by a one-off public holiday that closed many businesses, Britain’s economy shrank 0.6%. That was a larger monthly decline than the median forecast for a 0.4% contraction in a Reuters poll and the largest since January 2021, when there was a shutdown due to COVID-19.

But the August GDP data was revised to show a marginal 0.1% contraction compared to the original 0.3% contraction, and July GDP is now seen as growing 0.3%, up from the previous estimate of 0.1%.

The ONS said upward revisions to GDP data for July and August mostly reflected new quarterly numbers related to health and education output, along with some stronger readings from the professional, scientific and wholesale and retail sectors.

(Reporting by William Schomberg and David Milliken). Editing by Kate Holton and Catherine Evans

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