The United Kingdom is on the Verge of Recession as the Economy Contracted 0.2% in the Third Quarter

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Last Updated on November 11, 2022 by Bitfinsider

The U.K. The economy fell 0.2% in the third quarter of 2022, heralding the beginning of what might be a protracted recession.

Despite the recession, the preliminary assessment indicates that the economy performed better than anticipated in the third quarter. According to Refinitiv, economists had anticipated a 0.5% decrease.

The contraction does not yet constitute a technical recession, which is characterized by two consecutive quarters of negative growth, because the 0.1% contraction in the second quarter was corrected to a 0.2% increase.

“In output terms, there was a slowdown in the services, production, and construction industries during the third quarter of 2022,” the Office for National Statistics said in a report released on Friday. “The output of the services sector was flat, driven by a decline in consumer-facing services, while the output of the production sector fell by 1.5% in the third quarter of 2022, with declines in all 13 subsectors of the manufacturing sector.”

Last week, the Bank of England predicted the country’s longest recession since records began, indicating that the recession that began in the third quarter will likely continue well into 2024 and increase unemployment to 6.5% over the next two years.

The nation is facing an unprecedented cost of living crisis, fuelled by a squeeze on real incomes caused by soaring energy and tradeable goods costs. In an effort to manage double-digit inflation, the central bank just implemented the greatest increase in interest rates since 1989.

The ONS reported that the amount of quarterly GDP was 0.4% below its pre-Covid level in the fourth quarter of 2019. In the meantime, the month of September saw a decline in U.K. exports. The public holiday for the official burial of Queen Elizabeth II decreased GDP by 0.6%.

Next week, U.K. Finance Minister Jeremy Hunt will unveil a new fiscal policy plan that is expected to involve significant tax increases and spending cuts. In order to stabilize the economy, Prime Minister Rishi Sunak has cautioned that “tough decisions” will need to be made.

George Lagarias, chief economist of Mazars, stated, “While certain headline inflation data may begin to look better in the future, we expect prices to remain excessive for some time, adding to demand pressures.”

“Should next week’s budget prove indeed ‘tough’ for taxpayers, as anticipated, consumption will likely be further stifled, and the Bank of England should consider the implications of a demand shock on the economy,”

The Dutch bank ING suffers cumulative losses in the United Kingdom. A 2% GDP decline by the middle of 2023 would be equal to the 1990s recession.

As consumer spending declines, ING Developed Markets Economist James Smith predicts a 0.3% decrease in economic activity in the fourth quarter, which would cement the technical recession.

“As the winter progresses, we also anticipate more strain in the manufacturing and construction industries – both of which suffered significantly during the recessions of the 1990s and 2008,” Smith added.

“The decline in manufacturing new orders, which is correlated with a decline in global consumer demand for goods and growing inventory levels, as well as higher energy costs, indicates that production will decline by the beginning of 2023. Similarly, the rapid increase in mortgage rates and the earliest indications of home price decreases lead to a decline in construction activity into next year.”

ING anticipates that the Bank of England’s interest rate hike path would peak at approximately 4%, although Smith highlighted that much will rely on the fiscal announcements made next week.

“Understandably, much attention will be paid to how the Chancellor closes the projected fiscal deficit in 2026/27. But above all, we’ll be watching for specifics on how the government will reduce its energy subsidies beginning in April, which has the biggest potential to alter the forecast for 2023,” he said.

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