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 — UK economy shrank 0.2% in the third quarter of 2022, which could be the start of a protracted recession.
The preliminary estimate indicates that the economy performed better than expected in the third quarter, despite the downturn. Economists had predicted a 0.5% contraction, according to Refinitiv.
The contraction does not yet represent a technical recession – marked by two consecutive quarters of negative growth – after the 0.1% contraction in the second quarter was revised to a 0.2% increase.
“In terms of output, there was a slowdown in the quarter for the services, manufacturing and construction sectors; the services sector slowed to flat output in the quarter due to a decline in consumer-oriented services, while the manufacturing sector in Q3 2022, including declines in all 13 manufacturing subsectors,” the Office for National Statistics said in its report Friday.
The Bank of England last week forecast the country’s longest recession since records began, suggesting the downturn that started in the third quarter is likely to last well into 2024 and the unemployment rate to 6.5 over the next two years. % will bring.
The country is facing a historic cost of living crisis, fueled by pressures on real incomes from rising energy and tradable goods prices. The central bank recently imposed its largest rate hike since 1989 as policymakers tried to curb double-digit inflation.
The ONS said its quarterly GDP level 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 by 0.6%, were out. , influenced by the holiday for the state funeral of Queen Elizabeth II.
UK Chancellor of the Exchequer Jeremy Hunt is set to announce a new fiscal policy agenda next week, which is expected to include substantial tax hikes and austerity measures. Prime Minister Rishi Sunak has warned that “difficult decisions” will have to be made to stabilize the country’s economy.
“While some headline inflation numbers are starting to look better from now on, we expect prices to remain elevated for some time to come, putting even more pressure on demand,” said George Lagarias, chief economist at Mazars.
“Should next week’s budget prove indeed ‘difficult’ for taxpayers, as expected, consumption is likely to be further suppressed, and the Bank of England should begin to reflect on the impact of a demand shock on the economy.” .”
Dutch bank ING sees a cumulative hit in UK GDP of 2% by mid-2023, comparable to the country’s recession in the 1990s.
Developed markets economist James Smith said the bank expects a 0.3% contraction in economic activity in the fourth quarter as consumer spending slumps, which would intensify the technical recession.
“As the winter progresses, we also expect more tension to build in the manufacturing and construction sectors — both sectors suffered noticeably during the 1990s and 2008 recessions,” Smith said.
The decline in new order production, coupled with falling global consumer demand for goods and rising inventory levels, as well as higher energy costs, point to lower production by early 2023. Similarly, the sharp rise in mortgage rates and the very early signs of declines in house prices point to weaker construction activity into next year.”
ING expects the Bank of England’s interest rate path to peak around 4%, but Smith noted that much will depend on next week’s tax announcements.
“A lot of the focus will understandably be on how the Chancellor will close the projected budget deficit in 2026/27. But above all, we’ll be looking for details on how the government will make its energy support less generous from April, something the biggest scope to reshape the outlook for 2023,” he said.