UK economy shrinks more than expected in third quarter

Britain’s economy contracted more than expected in the third quarter and lagged further behind other advanced economies as households struggled with high inflation.

Data released by the Office for National Statistics on Thursday also suggested consumers are not dipping into their savings as much as expected, suggesting the UK recession could be deeper than expected.

UK output fell 0.3% between the second and third quarters, a bigger contraction than initial estimates of 0.2%, the data showed.

In the third quarter, the economy was 0.8% lower than in the last quarter of 2019, before the Covid pandemic.

All other G7 economies, on the other hand, have regained ground lost during the pandemic. In the three months to September, the US economy was 4.3% larger than in the fourth quarter of 2019, while eurozone output rose 2.2%.

Line graph of real GDP, Q4 2019=100 showing underperformance of UK economy

Gabriella Dickens, a UK economist at consultancy Pantheon Macroeconomics, warned that the UK economy will continue to underperform other G7 countries.

“We expect Britain to suffer the deepest recession among major advanced economies in 2023, due to the severity of monetary and fiscal policy headwinds,” she said.

Last month the OECD, a club made up mainly of wealthy countries, also predicted that the UK would be the worst-performing economy in the G20, apart from Russia, over the next two years.

The ONS also revealed that the non-pension savings rate – the average share of income that is saved – rose to 1.8% in the third quarter, from 1.3% in the previous quarter. The figures indicate that people are becoming more cautious in the face of rising economic risks.

The Office for Budget Responsibility, Britain’s fiscal watchdog, forecast last month that the savings rate would fall to zero in the third quarter as households dipped into their savings to cushion the impact of rising prices.

Consumers continuing to save, rather than spend, could lead to a deeper recession than the 2.1% peak-to-trough drop predicted by the OBR.

ONS data showed that real household disposable income – the amount available to spend after accounting for inflation – fell by 0.5% between the second and third quarters.

It was the fourth straight decline as wages failed to keep up with inflation. With real income falling or stagnating for most of the past three years, real household income was 2.9% lower in the third quarter of 2019 – the biggest drop in this period since records began.

Column chart of percentage change in same quarter 3 years before showing UK household real disposable income suffers biggest 3-year decline on record

After adjusting for inflation, household spending fell 1.1% in the third quarter, the first drop since the start of last year when the country was in lockdown.

Many economists believe that the fall in the third quarter marks the start of a prolonged recession. Thomas Pugh, an economist at audit, tax and consultancy firm RSM UK, said the economy may not be bigger in 2025 than it was in 2019, before the pandemic.

“The upshot is that the UK is almost certainly already in a year-long recession that could prove deeper than that seen in the early 1990s,” Pugh said.

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