The UK economy shrank 0.2% in the third quarter, early official figures show, prompting the chancellor to warn of a “difficult road ahead” that will require “extremely difficult decisions”.
The figure marked the first step towards recession.
The Office for National Statistics (ONS) reported a drop in output for September, leaving gross domestic product (GDP) in negative territory for the July-September period as a whole.
Quarterly GDP is the value of all goods and services produced during a three-month period and is a measure of the health of the economy.
The official definition of a recession is two consecutive quarters of negative growth.
It would be achieved if the economy also contracted in the current fourth quarter through the end of the year.
“I am under no illusions that there is a difficult road ahead, one that will require extremely difficult decisions to restore confidence and economic stability. But to achieve long-term sustainable growth, we need to control inflation, balance the books and go into debt. falling. There’s no other way,” Hunt said.
Hunt blamed the Russian invasion of Ukraine for fueling inflation.
“We are not immune to the global challenge of high inflation and slow growth driven largely by Putin’s illegal war in Ukraine and his weaponization of gas supplies,” he said.
“While the global economy is facing extreme turmoil, the fundamental resilience of the UK economy is cause for long-term optimism.”
The quarterly contraction was not as bad as expected.
Economists polled by Reuters had expected a contraction of 0.5% after growth was revised up from 0.2% for the second quarter of this year.
The panorama was seen as so terrible by the Bank of England last week that declared the UK was already in a recession, outlining a scenario in which the economy could contract for eight consecutive quarters starting in the third quarter of 2022.
That would make the recession the longest since records began, though the depth of the slump would be moderate compared to that seen after the 2008 financial crisis.
There was a sharp drop in GDP in September, which according to the ONS was affected by the bank holiday for the funeral of Her Majesty Queen Elizabeth II. Some businesses that closed or operated differently on this day resulted in a 0.6% contraction for the month.
Even excluding the additional bank holiday in September, the Confederation of British Industry (CBI) contraction said “it is clear that underlying activity has weakened”.
The recession is being driven by the effects of falling consumer spending in the cost of living crisis, which has resulted in an economy 0.4% smaller than the COVID-19 pandemic.
Costs began to rise globally because demand outstripped supply at the end of the lockdowns.
Then an economic bombshell exacerbated the inflation problem when Russia invaded Ukraine in February, raising the costs of many basic goods like oil, gas, wheat and other food.
The fallout, including the impact of Western sanctions on Moscow, pushed up prices that were then passed through supply chains to the consumer.
Rising interest rates to deal with inflation, not just in the UK but in much of the world, has forced borrowing costs to rise to further reduce purchasing power.
UK borrowers have endured additional pain after the Truss government’s decision. interim budget it unleashed a crisis of confidence in UK public finances in financial markets, the damage of which is still being felt by mortgage customers in particular.
A weaker pound has also added to inflation because it drives up the cost of imports.
The fall in GDP could mark the beginning of a recession, but there is a glimmer of hope
Ed Conway, our economics and data editor, has given his immediate reaction to the news that GDP is down 0.2% in the third quarter of 2022.
He says that while the fact that the economy is contracting is “obviously not good news,” the downturn is “less bad than many economists had predicted.”
“The fact that GDP is shrinking is obviously not good news, however, 0.2% is less bad than many economists had predicted: they thought it was going to go down by around 0.5%,” Conway said.
“This is a little better than expected, but even so, it still suggests that we are at the beginning of a potential period of contraction.
“People have been talking a lot about recession recently. Well, it’s a bit of an arbitrary term, but essentially what it means is when you have two consecutive quarters of contraction in the economy.
“That technically constitutes a recession. Most economists think that next quarter we’re going to contract, and potentially the quarter after that.”
“This may be the beginning of a period of economic contraction.
“But like I say, it’s a little bit better than we expected, so there’s a little ray of hope.”
He concluded that while the drop “is not good news,” it is “certainly not as dire as some had believed.”
The chancellor faces an uphill battle in his upcoming fall economic statement on November 17.
“A shrinking economy makes the fall filing much more challenging, because it means less tax revenue for the government, while aggressive spending cuts and tax increases would lead to a longer and more damaging recession,” Suren Thiru, economics director of the Institute of Public Accountants. in England and Wales, he said.
Hunt has been warned not to resort to austerity.
“A shift to tighter fiscal policy expected in next week’s autumn statement could help prolong any recession,” said Yael Selfin, chief economist at KPMG UK.
“Interest rate hikes and the prospect of the Bank of England raising them further could exacerbate the stagnation in the UK housing market, prompting deeper spending cuts.”