The Bank of England has warned that the UK is facing its longest recession since records began a century ago.
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LONDON — Britain’s economy contracted by 0.2% in the third quarter of 2022, signaling what could be the start of a long recession.
The preliminary estimate indicates that the economy performed better than expected in the third quarter, despite the slowdown. Economists had forecast a contraction of 0.5%, according to Refinitiv.
The contraction does not yet represent a technical recession – characterized by two consecutive quarters of negative growth – after the 0.1% contraction in the second quarter was revised upwards by 0.2%.
“In terms of production, there was a slowdown during the quarter for the services, manufacturing and construction industries; the services sector slowed to flat production during the quarter, due to a drop in consumer services, while the production sector fell by 1.5% in Q3 2022, including falls in all 13 sub-sectors of the manufacturing sector,” the Office for National Statistics said in his report on Friday.
The Bank of England last week predicted the country’s longest recession since records began, suggesting the slowdown that started in the third quarter is likely to last until 2024 and push unemployment up to 6.5% during of the next two years.
The country is facing a historic cost of living crisis, fueled by a squeeze in real incomes due to soaring energy and tradable goods prices. The central bank recently imposed its biggest interest rate hike since 1989 as policymakers try to rein in double-digit inflation.
The ONS said the level of quarterly GDP in the third quarter was 0.4% lower than its pre-Covid level in the last quarter of 2019. Meanwhile, figures for September, in which UK GDP fell fell 0.6%, were affected by the holiday. for the state funeral of Queen Elizabeth II.
UK Finance Minister Jeremy Hunt will announce a new fiscal policy agenda next week, which is expected to include major tax hikes and spending cuts. Prime Minister Rishi Sunak has warned that “difficult decisions” will have to be made in order to stabilize the country’s economy.
“While some headline inflation numbers may start to improve from now on, we expect prices to remain elevated for some time, adding further demand pressures,” said George Lagarias, chief economist at Mazars.
“If next week’s budget does indeed prove ‘tough’ for taxpayers, as expected, consumption will likely be further reduced, and the Bank of England should start considering the impact of a demand shock on the economy.”
Dutch bank ING sees a cumulative hit to UK GDP of 2% by mid-2023, which would be comparable to the country’s recession in the 1990s.
ING’s developed markets economist James Smith said the bank forecast a 0.3% contraction in economic activity in the fourth quarter as consumer spending declines, cementing the technical recession.
“As winter progresses, we also expect to see more stress emerge in manufacturing and construction – both of these sectors suffered noticeably during the recession of the 1990s and 2008,” Smith said.
“Falling new manufacturing orders, linked to falling global demand for goods and rising inventories, as well as rising energy costs, point to lower production by the start of of 2023. Likewise, the sharp rise in mortgage rates and the very first signs of falling house prices, point to weaker construction activity over the next year.”
ING expects the Bank of England’s interest rate hike path to peak at around 4%, but Smith noted much will depend on next week’s budget announcements.
“Much of the focus will naturally be on how the Chancellor closes the projected budget shortfall in 2026/27. But more importantly, we will be looking for details on how the government will make its energy support less generous from April, which has the most leeway to reshape the outlook for 2023,” he said.