Warnings of recession flash as GDP drops in UK

Recession fears have returned with latest official figures showing GDP unexpectedly fell 0.3 per cent in October. Economists in London had been predicting output to be flat in the month and one said the surprise dip meant that recession warning indicators are now “flashing red” again. The monthly slump exacerbated by stormy weather, means that the economy did not advance at all in the three months to October.

Office for National Statistics (ONS) director of economic statistics, Darren Morgan said: “Our initial estimates suggest that GDP growth was flat across the last three months. Increases in services, led by engineering, film production and education – which recovered from the impact of strikes during the summer – were off set by falls in both manufacturing and housebuilding.

“October, however, saw contractions across all three main sectors. Services were the biggest driver of the fall with drops in IT, legal firms and film production. These were also compounded by widespread falls in manufacturing and construction, which fell partly due to poor weather.”

The ONS said that the dominant services sector shrank 0.2 per cent in October, while the productive sector, which includes manufacturing was down 0.8 per cent. Construction output was down 0.5 per cent. Rising interest rates have weighed heavily on consumers and businesses while the cost-of-living crisis has also hit the high street and hospitality sectors.

Chancellor Jeremy Hunt said: “It is inevitable GDP will be subdued whilst interest rates are doing their job to bring down inflation. But the big reductions in business taxation announced in the Autumn statement means the economy is now well placed to start growing again.”

The ONS figures continue the trend of sluggish growth that had characterised the British economy since the initial bounce back from the pandemic. They came on the eve of the Bank of England’s latest decision on interest rates. It was widely assumed that the rates will be left unchanged at 5.25 per cent, almost exactly two years after they were first raised from the pandemic emergency rate of 0.1 per cent in December 2021.

Senior economist at consulting firm RSM UK, Thomas Pugh said: “The contraction in GDP in October, coming on the back of flatlining growth in Q3, has our recession warning indicators flashing red. However, growth should pick up over the rest of the quarter as a sharp fall in inflation, strong wage growth and government transfers to low-income households all give consumer spending a boost. As a result, we expect Q4 to look more like a repeat of Q3 than the start of a recession.”

There have been further comments from head of financial analysis at broker AJ Bell, Danni Hewson: “The disruption caused by strikes won’t have helped, but even with the continued squeeze on consumer spending, the contraction in economic growth recorded in October was greater than had been expected.

“All sectors of the economy were affected with the impact of two years of interest rate hikes. The big question is whether October is the harbinger of recession or a tipping point as wage growth finally surpasses inflation?

European strategist at Raymond James Investment services, Jeremy Batstone-Carr said: “The latest GDP figures drop is a reminder that the gloomy outlook is here to stay. Dark clouds and early sunsets have dampened consumer spirits, which remain bruised by the continuing cost-of-living crisis.

“The latest ONS figures should serve as a spoiler of further muted economic activity to come in the new year, particularly as the lagged impact of earlier rate hikes are still working their way into the economy. The global economy remains equally tarnished, creating a challenging situation for the UK’s export activity, as demonstrated by a widening trade deficit.” (The writer is our foreign correspondent based in the UK)