Britain ‘step closer to recession’ after economy shrank in August

Britain’s economy unexpectedly shrank in August, reinforcing forecasts that the UK is on course for a recession as the cost-of-living crisis hits hard.

The Office for National Statistics (ONS) said gross domestic product (GDP) dropped by 0.3% between July and August, down from growth of 0.1% the previous month, which was downwardly revised from the 0.2% previous estimation.

Economists had been expecting zero growth in August.

The latest data means the economy is likely to contract overall in the third quarter, with the ONS confirming there would need to be growth of more than 1% in September to avert a quarterly decline.

It comes amid fears that the UK is heading for a recession – defined as two or more quarters of falling GDP output – as the cost-of-living crisis takes its toll on households and businesses.

Samuel Tombs, at Pantheon Macroeconomics, warned the UK was “a big step closer to a recession”.

He added: “We look for a 0.5% quarter-on-quarter drop in GDP in the fourth quarter, building on a similar decline in the third quarter, and a 1.5% year-over-year decline in 2023 as a whole.”

Mr Tombs warned the recession may not end until late 2023 at the earliest.

Chancellor Kwasi Kwarteng insisted the Government’s energy support package and growth plan will “address the challenges that we face”.

But the financial market turmoil sparked by his mini-budget has sent mortgage rates soaring, heaping yet more pressure on cash-strapped Britons.

The International Monetary Fund (IMF) warned on Tuesday that the UK economy could sharply reduce in 2023 as consumer spending catches up with rampant inflation and higher interest rates.

It downgraded its forecast for UK GDP growth next year to just 0.3% in 2023 from 0.5% previously pencilled in.

Mr Kwarteng said: “Our growth plan will address the challenges that we face with ambitious supply-side reforms and tax cuts, which will grow our economy, create more well-paid skilled jobs and, in turn, raise living standards for everyone.”

The ONS said there has been a continued slowing in three-month on three-month growth, with GDP falling by 0.3% in the quarter to August.

Grant Fitzner, chief economist of the ONS, said: “The economy shrank in August, with both production and services falling back, and with a small downward revision to July’s growth the economy contracted in the last three months as a whole.

“Oil and gas production fell as more scheduled North Sea summer maintenance took place than usual.

“Notable decreases were also seen across much of manufacturing.”

He added: “Sports events too had a slower month after a strong July and many other consumer-facing services struggled, with retail, hairdressers and hotels all faring relatively poorly.”

The Bank of England has already predicted the economy will fall into recession towards the end of the year and has forecast a contraction of 0.1% in the third quarter.

GDP narrowly grew in the second quarter, edging up by 0.2% over the three months to June after being recently revised upwards by the ONS.

But Martin Beck, chief economic adviser to the EY Item Club, said the UK was on course for a “substantial fall” in GDP overall in the third quarter, due in part to September’s extra bank holiday for the Queen’s funeral.

The latest ONS data showed manufacturing output dropped 1.6% in August, while the services sector also saw a decline, down 0.1%.

Output in consumer-facing services tumbled by 1.8% in August after growth of 0.7% in July, according to the figures.

The construction sector was the only one of the three main parts of the economy to see growth in August, with 0.4% expansion.