Bloomberg: decline in UK GDP heralds the start of a prolonged recession

Source: Bloomberg

Author: Andrew Atkinson

Article: Original article

Publication date: Friday, November 11, 2022

The U.K. economy declined in the third quarter, marking the beginning of a prolonged recession. 

GDP fell 0.2%, meaning that the U.K. is the only economy among the G-7 countries that has not yet fully recovered from the pandemic with output still 0.4% below pre-pandemic levels.

Consumer spending and business investment fell during the quarter, according to the Office of National Statistics.

Households and businesses now face two bleak years as the Bank of England and the government exacerbate the cost-of-living crisis while tightening policy. The risk is that an overly restrictive stance will exacerbate the coming recession.

The Bank of England, which has raised interest rates eight times since last December, says a recession is the inevitable price to pay for bringing double-digit inflation under control. The Bank of England's scenario is that the recession could last until mid-2024, making it the longest recession since 1920.

Meanwhile, Prime Minister Rishi Sunak is preparing to announce tens of billions of pounds in tax hikes and spending cuts next week to close the hole in public finances and restore confidence after the market turmoil caused by his predecessor, Liz Truss' proposed tax cuts.

How well the economy holds up will depend on people's willingness to spend more of their income and use about 200 billion pounds of the excess savings accumulated during the pandemic, when quarantine restricted spending.

Meanwhile, the drop in GDP was less than the 0.5% economists expected, reflecting upward revisions to output in July and August.

Forecast:

Seeing that the national economy has already entered recession, it is hard to imagine that the Bank of England will nonchalantly continue to raise rates and thus further exacerbate the crisis. We will probably hear softer rhetoric from officials as soon as the December meeting, otherwise the current government will not last much longer than the Liz Truss team.