Source: AFP
Britain’s economy unexpectedly shrank in the third quarter and shrank gradually in the previous three months, official data showed on Friday, raising fears of a recession ahead of next year’s election.
The disappointing news is a blow to Conservative Prime Minister Rishi Sunak, who trails opposition Labor leader Keir Starmer in the polls despite a sharp slowdown in inflation.
Gross Domestic Product (GDP) shrank by 0.1% between July and September as services output slipped, from a previous estimate of zero, the Office for National Statistics (ONS) said in a statement.
Business has been hit by the Bank of England’s aggressive rate hikes, which are aimed at curbing rising inflation and easing a cost-of-living crisis.
The ONS added that the economy held steady in the second quarter, reducing its previous estimate of a 0.2% expansion.
This has sparked speculation of a possible recession defined as two consecutive quarters of negative economic growth.
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“The decline in real GDP in the third quarter may signal the beginning of a milder recession,” Capital Economics analyst Ashley Webb noted.
“But whether there is a small recession or not, the big picture is that we expect real GDP growth to remain subdued throughout 2024.”
Inflation is falling
Sunak was boosted on Wednesday as separate ONS data showed inflation slowed sharply to the lowest level in more than two years.
The Consumer Price Index came in at 3.9% in November from 4.6% the previous month, hitting the lowest level since September 2021.
However, the rate is almost double the BoE’s target of 2.0%.
However, core inflation – which strips out food and energy costs – eased slightly to 5.2% in November from 5.6% in October.
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Last week, the BoE froze its key interest rate at a 15-year high of 5.25 percent — but warned it would remain high to tackle stubbornly high consumer prices.
The central bank paused in September, November and December, marking a string of 14 rate hikes as inflation slowed.
These increases reduced economic activity because commercial banks passed on higher borrowing costs to both businesses and consumers.
‘Collection’
“Cutting by households and businesses in response to the jump in borrowing costs dragged down GDP on a quarterly basis,” said Pantheon Macro economist Samuel Tombs.
In brighter news, the ONS also revealed on Friday that retail sales strengthened in November as shoppers seized opportunities to cut prices ahead of Christmas.
Retail sales volume rose 1.3% in November. That comfortably beat market expectations for a 0.4% gain.
Darren Morgan, director of economic statistics at the ONS, said the overall UK economy was “little changed” throughout the year.
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“The latest (GDP) data… show that the economy performed slightly less well in the last two quarters than our initial estimates,” Morgan added.
“The bigger picture, however, remains an economy that has changed little over the past year.”
UK inflation had soared to a 41-year high of 11.1% in October 2022, fueled by a surge in energy prices after oil and gas major Russia’s invasion of Ukraine sparked a cost squeeze of life.
Source: AFP