Chancellor warns of 'tough road ahead' as economy shrinks and Britain slides towards recession

11 November 2022, 07:03 | Updated: 11 November 2022, 08:20

Chancellor Jeremy Hunt has warned of a "tough road ahead" after the UK's economy shrunk by 0.2 per cent between July and September, in what some experts say could be the start of the longest recession since record began.

It follows growth of 0.2 per cent in the previous quarter.

Because a recession is defined as two consecutive quarters of shrinking GDP, it is the first step towards a recession in the UK.

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The ONS said that gross domestic product (GDP) had fallen by 0.6 per cent in September, in part due to the Queen's funeral, adding to the overall three-month drop.

The September figure was worse than expected - analysts had forecast a 0.5 per cent drop during the month, according to Pantheon Macroeconomics.

However, the ONS changed its readings for August and July, helping for the quarter as a whole.

The economy was previously thought to have shrunk by 0.3 per cent in August but that was revised to 0.1 per cent.

In July the economy had previously thought to have risen by 0.1 per cent - the ONS changed that to 0.3 per cent.

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The reading comes just a week after the Bank of England published a caveated forecast that the UK might be headed for an eight-quarter recession - the longest consecutive recession since reliable records began in the 1920s.

However, the Bank itself cautioned that this would only happen if it raises interest rates to around 5.2 per cent - which the market was expecting at the time.

The Bank itself said it did not expect rates to reach such a high level, which would imply that the recession could be less drawn out.

ONS director of economic statistics Darren Morgan said: "With September showing a notable fall partly due to the effects of the additional bank holiday for the Queen's funeral, overall the economy shrank slightly in the third quarter.

"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."

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Mr Hunt said: "We are not immune from the global challenge of high inflation and slow growth largely driven by Putin's illegal war in Ukraine and his weaponisation of gas supplies.

"I am under no illusion that there is a tough road ahead - one which will require extremely difficult decisions to restore confidence and economic stability. But to achieve long-term sustainable growth, we need to grip inflation, balance the books and get debt falling. There is no other way.

"While the world economy faces extreme turbulence, the fundamental resilience of the British economy is cause for optimism in the long run."

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Labour's Ms Reeves said: "Today's numbers are another page of failure in the Tories' record on growth, and the reality of this failure is family finances crunched, British businesses left behind and more anxiety for the future.

"Britain's unique exposure to economic shocks has been down to a Conservative-led decade of weak growth, low productivity and under-investment and widening inequality."

She went on: "We're already set to be near the bottom of global league tables on growth, but all the Tories offer yet again is austerity.

"Britain has so much potential to grow. We have the talent. We have the capacity. Labour's Green Prosperity Plan, our modern industrial strategy, our plan to boost skills and our active partnership with business will get our economy firing on all cylinders."