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UK activity contracts in the 3rd quarter, recession looms

At Walthamstow market in east London on November 11, 2022 (Tolga Akmen/AFP/Archives)

British activity marked time in the third quarter when inflation and the cost of living crisis weighed on the economy, which looks set to enter recession.

Gross domestic product (GDP) fell 0.2% between July and September, compared with a 0.2% increase in the second quarter, the Office for National Statistics (ONS) said on Friday in its monthly activity report.

The fall was particularly significant in September (-0.6%) due to the national holiday for the funeral of Elizabeth II, which resulted in the closure of a large number of businesses.

The ONS cites rising costs as a factor weighing on business output, with inflation running at around 10% in the country.

The consumer and retail sector suffered in particular from consumer reluctance to face sky-high bills.

The end of September was also marked by financial turmoil triggered by the previous government’s massive and unfunded fiscal measures led by former Prime Minister Liz Truss.

Ex-finance minister Kwasi Kwarteng appeared to partially shrug off the failure, saying in a Talk TV interview that he had tried to warn Liz Truss that their pro-growth fiscal measures were moving “too fast”, although he acknowledges that they “surprised the markets” and that he bears the responsibility.

A clothing store in east London, Britain, where the recession is looming, February 4, 2022
A clothing store in east London, Britain, where the recession is looming, February 4, 2022 (Tolga Akmen/AFP/Archives)

These budget announcements had sent the pound plunging to historic lows and interest rates on long-term UK debt rising, impacting business and household lending, particularly as the Bank of England is already mid-cycle. to raise interest rates to curb inflation.

It last week hiked interest rates by 0.75 basis points to 3%, the biggest since 1989, as it painted a bleak economic picture and warned of a recession that could be the UK’s longest known.

All these factors undermine the confidence of consumers, investors and business leaders.

difficult road

Samuel Tombs, of Pantheon Macro, notes that the drop in activity in September is more significant than expected by analysts.

European economic forecasts
European Economic Forecasts (Valentin RAKOVSKY / AFP)

“The UK economy is once again at the bottom of the G7 pack, weighed down by its monetary and fiscal policy and significant long-term damage from Covid and Brexit,” he comments.

Especially this summer, many sectors of the economy have been disrupted by the lack of workers, partly due to an exit from the labor market by the over 50s or by people suffering from long-term illnesses, many due to the consequences of Covid.

This labor shortage was also attributed to Brexit, which is making it difficult for European workers to come to the UK.

Paul Dales of Capital Economics believes that even if you strip out the impact of the holidays, “real GDP is showing a decline in the third quarter and we think that marks the start of the recession” – the generally accepted definition of which is at least two on consecutive quarters of contraction.

“We are not escaping the global problems of high inflation and slow growth, largely due to Russia’s illegal war” in Ukraine and restrictions on Russian gas supplies that have sent energy prices skyrocketing and inflation soaring, justified Chancellor of the Exchequer Jeremy Hunt.

Referring to a “difficult road ahead” which will “require extremely tough decisions to restore confidence and economic stability”, he insists that “to achieve long-term growth, we must curb inflation, balance the accounts and reduce debt”.

The minister is due to present a budget proposal next week, which will include cuts in public spending and tax increases, raising fears of a return to austerity in the country.

Labor finance chief Rachel Reeves called the GDP figures “extremely worrying”.

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