UK economy shrinks in third quarter

Activity adversely impacted by interest-rate hikes, elevated inflation and a sliding services sector

Prime minister Rishi Sunak (Photo by Carl Court/Getty Images)

Chandrashekar Bhat

BRITAIN’S economy unexpectedly shrank in the third quarter, official data showed Friday (22), raising fears of a potential recession before an election due next year.

Gross domestic product contracted 0.1 per cent between July and September, down from a prior estimate of zero growth, the Office for National Statistics said in a statement.

Activity was adversely impacted by interest-rate hikes, elevated inflation and a sliding services sector.

The ONS added that the economy flatlined in the second quarter, slashing its previous estimate of 0.2-per cent expansion.

That sparked speculation over a potential recession which is defined as two straight quarters of negative economic growth.

“The fall in real GDP in the third quarter may mean that the mildest of mild recessions started,” noted Capital Economics analyst Ashley Webb.

“But whether or not there is a small recession, the big picture is that we expect real GDP growth to remain subdued throughout 2024.”

Friday’s downbeat news delivers a blow to Conservative prime Minister Rishi Sunak, who trails opposition Labour leader Keir Starmer in the polls as Britons buckle under a cost-of-living crisis.

Sunak was buoyed on Wednesday (20) as separate ONS data showed that British inflation slowed sharply to the lowest level in more than two years, following a series of Bank of England rate hikes.

The Consumer Prices Index hit 3.9 per cent in November from 4.6 per cent in the previous month, attaining the weakest rate since September 2021.

The rate is nevertheless almost double the BoE’s official target of 2.0 per cent.

Yet core inflation – which strips out food and energy costs – eased only slightly to 5.2 per cent in November from 5.6 per cent in October.

The BoE last week froze its key interest rate at a 15-year peak of 5.25 per cent – but warned that it will remain elevated to tackle stubbornly high consumer prices.

The central bank hit pause in September, November and December, snapping a series of 14 rate hikes as inflation slowed.

Those hikes dented economic activity because commercial banks pass on the higher borrowing costs to both businesses and consumers.