Wednesday, October 12, 2022
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UK economy shrinks as cost of living crisis bites

The UK economy disappointed expectations by shrinking in August as the cost of living crisis contributed to a sharp fall in manufacturing production and consumer services, suggesting the economy may already be in recession.

Maintenance in the North Sea pushed down oil and gas production, which was a further drag on industrial output, according to data published on Wednesday by the Office for National Statistics.

Gross domestic product fell 0.3 per cent between July and August, the data showed, falling short of forecasts by economists polled by Reuters who predicted no month-on-month change.

In the three months to August, economic output was down 0.3 per cent compared with the previous three months, also dropping back from analysts’ expectations.

“The UK economy is teetering on the edge of recession,” said Yael Selfin, chief economist at KPMG UK. She added that “the ongoing squeeze on household finances continues to weigh on growth”, and was likely to have caused the UK to enter a technical recession from the third quarter of this year.

Growth was revised down in July and the economy is now smaller than at the start of the year, after having recovered to pre-pandemic levels.

Commenting on the ONS data, chancellor Kwasi Kwarteng said the UK’s soaring energy prices had been caused by Russia’s invasion of Ukraine, and expressed confidence that the government’s fiscal plan would “grow our economy”.

However, Brian Coulton, chief economist at the rating agency Fitch, expects the economy to shrink by 1 per cent in 2023 because of continued market turmoil and the prospect of higher interest rates following Kwarteng’s announcement of unfunded tax cuts last month.

Robert Alster, chief investment officer at the investment management company Close Brothers Asset Management, said that “a lot will depend on what the chancellor says in the Budget next month” when the Treasury will seek to bolster confidence in UK debt sustainability.

“Unless they succeed, financial conditions will remain tight and are likely to weigh on growth,” he added.

Despite the disappointing reading, markets still expect the Bank of England to increase rates by 75 points as the bank battles with persistently high inflation.

ONS data showed that output in consumer-facing services, such as restaurants, shops and entertainment, fell 1.8 per cent in August and remained 8.9 per cent below pre-pandemic levels, in a sign that consumers are tightening their belts amid soaring prices.

Industrial production contracted sharply by 1.8 per cent between July and August, with sharp falls in pharmaceutical and car production because of unprecedented cost pressures at a time of weakening demand and soaring borrowing costs.

The health sector also contributed to the GDP decline, with a drop in the number of hospital consultations and operations.

The ONS also showed that imports rose faster than exports because of higher prices for energy, of which the UK is a net importer.

As a result, in the three months to August, the trade deficit, excluding precious metals, widened by £200mn to £25.6bn compared with the previous three months, the largest since records began in 1997.

Gabriella Dickens, senior UK economist at Pantheon Macroeconomics, expected the trade deficit to remain “huge” by past standards, despite the recent depreciation in sterling that should boost exports.

“Sterling, therefore, will remain very sensitive to any changes in overseas investors’ willingness to provide finance to UK institutions,” she added.



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