The UK economy is contracting faster than expected: “The road ahead is going to be tough and requires extremely difficult decisions”. Data confirm Bank of England forecasts, which point to a mild and very prolonged recession starting in the current quarter. The UK’s gross domestic product (GDP) fell 0.2% in the July-September quarter, driven by a decline in the manufacturing sector estimated at 1.5%, compared to the previous period. In addition, the country’s economy contracted by 0.6% in the month of September due to the extra national holiday and the closure of stores and factories that took place during the weeks of mourning and the funeral of Queen Elizabeth, according to the Office for National Statistics (ONS).
Official data also indicate a deterioration in consumer spending of 0.5% in the third quarter of 2022. Inflation was estimated at 10.1% in September and may peak at 11% in January before turning the upward curve to 5.7% by the end of next year, according to a report by the National Institute of Economic and Social Research (NIESR), published on Friday.
It gets worse
The reduction in economic activity is in line with Bank of England forecasts, which point to a mild and very prolonged recession starting in the current quarter. Two consecutive cycles of negative GDP are considered recessionary, and few doubt that the UK is already technically in an economic crisis. Analysts at the issuing bank project more than five consecutive quarters with the state’s numbers in the red. The x-ray of the economic situation provides the framework for the “Autumn Statement”, which Treasury head Jeremy Hunt is preparing to issue next week. In his planned address to Parliament in Westminster on November 17, the minister will unveil the tax and public spending program agreed upon by Rishi Sunak’s new Conservative government to reduce debt over the medium term.
The Treasury acknowledges the effect on personal income tax of collecting half of every pound from low-income earners. “I am under no illusion that the road is going to be tough and requires extremely difficult decisions to restore confidence and economic stability. But we need to contain inflation, balance the (public) books, and reduce debt to achieve sustainable and lasting growth,” he said after the ONS estimates were published. Hunt took over as finance chief following the ouster of his predecessor, Kwasi Kwarteng, whose plan to cut taxes without justifying how the revenue reduction would be financed angered investors. The intense adverse reaction from capital markets led to the ouster of then Prime Minister Liz Truss and her replacement by Sunak last month. The new economic plan will inevitably lead to a real reduction in investment in public services and an increase in the tax burden.