The UK economy shrank in the third quarter, signaling the start of a recession that is likely to hit Europe next
As per the Office of National Statistics (ONS), the United Kingdom (U.K.) economy fell 0.2% during the July-September 2022 quarter, signaling the start of a recession that is likely to hit Europe next.
This comes after the U.K. economy reported 5 consecutive quarters of growth. The U.K. is the only G7 economy to have contracted in the 3rd quarter and is now 0.4% smaller than it was at the end of 2019, before the Coronavirus (COVID-19).
Speaking on the occasion, the Director of Economic Statistics, ONSD – Darren Morgan said, “The quarterly fall was driven by manufacturing, which saw widespread declines across most industries. Services were flat overall, but consumer-facing industries fared badly, with a notable fall in retail.”
The ONDS said that the extra bank holiday for Queen Elizabeth II’s funeral on September 19, also played a role, as some businesses closed or adjusted their operations that day.
The household incomes are being squeezed by decades of high inflation, interest rates are rising and business and consumer confidence is weakening. Brexit, COVID-19, unstable Government and U.K.’s decision of reducing dependency on Russian energy, are some of the major factors responsible for driving inflation.
Weak economic growth adds pressure on the U.K. Government as it tries to restore credibility with investors following a run on the pound and a bond market crash in September 2022, triggered by Former Prime Minister – Liz Truss’s plan to slash taxes while boosting spending and borrowing.
The Finance Minister of U.K. – Jeremy Hunt has reversed most of her plans in his first few days on the job and is expected to announce hefty tax rises and spending cuts next week in a bid to reduce debt in the medium term.
The Bank of England has raised interest rates by the most in 33 years but strongly pushed back against market expectations for the scale of future increases, warning that following that path would induce a 2-year recession. If this happens, it would be the longest recession since World War II and exceed the downturn that followed the 2008 global financial crisis. The Bank of England had warned last week that the U.K. economy could experience its longest recession since the 1940s.
Besides, the 3rd quarter contraction contrasts with expansion of 0.2% in France and Germany, and growth of 0.5% in Italy. The European Commission has also warned that high inflation and rising interest rates are likely to tip the Euro Zone into recession in the 4th quarter. It now expects inflation to peak at the end of the year at a rate of 8.5%.
