STOCK London UK economy
The fall in GDP was less than the 0.5% economists were expecting, reflecting upward revisions to output in July and August. Image Credit: Bloomberg

London: The UK economy shrank in the third quarter, marking the start of what is expected to be a protracted recession.

Gross domestic product fell 0.2 per cent, meaning Britain is the only Group of Seven economy that has yet to fully recover from the pandemic with output 0.4 per cent below pre-Covid levels.

In September alone, GDP dropped 0.6 per cent, reflecting an extra public holiday for the funeral of Queen Elizabeth II and the period of national mourning leading up to it. It was the second consecutive month of contraction.

Consumer spending and business investment both fell during the quarter, the Office for National Statistics said.

Households and businesses now face a bleak two years as the Bank of England and the government add to the cost of living crunch by tightening policy at the same time. The risk is that too restrictive a stance will make the coming recession worse.

The BOE, which has raised interest rates eight times since December, says a recession is the inevitable price of bringing double-digit inflation under control. The slump could last until mid-2024 under one BOE scenario, making it the longest in records dating back to 1920.

Prime Minister Rishi Sunak is meanwhile preparing to announce tens of billions of pounds of tax rises and spending cuts next week in an effort to plug a hole in the public finances and restore credibility following the market turmoil triggered by his predecessor Liz Truss’s proposed tax cuts.

How well the economy holds up will depend on the readiness of people to spend more of their income and draw down an estimated 200 billion pound of excess savings built up during the pandemic, when lockdowns restricted opportunities to spend.

The fall in GDP was less than the 0.5 per cent economists were expecting, reflecting upward revisions to output in July and August.