UK recession might be under way after economy shrinks in Q3

By William Schomberg and Sarah Young

LONDON (Reuters) -Britain’s economy might be in a recession, according to data that showed it shrank between July and September, shortly after finance minister Jeremy Hunt took the rare step of suggesting the Bank of England might cut interest rates to boost growth.

Gross domestic product (GDP) contracted by 0.1% in the third quarter, the Office for National Statistics (ONS) said.

It had previously estimated that the economy was unchanged from the previous three months and economists polled by Reuters had mostly expected another unchanged reading.

Similarly, second-quarter GDP was now estimated to have been flat, a cut from a previous estimate of 0.2% growth.

However, there were some more upbeat signs about the economy in separate data also published on Friday which showed retail sales in November jumped by much more than expected, increasing by 1.3% from October, boosted by discount sales.

The boost to retail sales volumes reflected heavy discounting during the Black Friday sales promotions. Sales fell over the three months to November and were still below their pre-pandemic levels, the statistics office said.

Sterling rose against the dollar and the euro immediately after the data releases.

Finance minister Hunt – whose Conservative Party is lagging far behind the opposition Labour Party in opinion polls with an election expected next year – took the unusual step of commenting on the BoE’s interest rate decisions.

“There’s a reasonable chance that if we stick to the course we’re on, we’re able to bring down inflation, the Bank of England might decide they can start to reduce interest rates,” Hunt said in an interview with the Financial Times published late on Thursday.

The BoE has stressed that it is premature to talk about cutting interest rates although a recent slowdown in Britain’s high rate of inflation has helped to fuel bets in financial markets that Bank Rate could fall to as low as 3.75% by the end of next year, from its current 15-year high of 5.25%.

After Friday’s figures, Hunt issued a statement saying the outlook for the economy was not as bad as the numbers suggested.

The ONS said the broader picture for the economy was one of little change over the last year.

UK LAGS MOST PEERS

Britain’s economy was now estimated to be 1.4% bigger than immediately before the COVID pandemic struck in early 2020, the second weakest recovery in the Group of Seven after Germany.

Economists were split on whether the third-quarter contraction in the economy would prove to be the start of a recession as defined by two consecutive quarters of shrinkage.

Ashley Webb, at Capital Economics, said the data suggested a mild recession might have begun with the economy showing signs of struggling again in the fourth quarter and because much of the hit from higher borrowing costs was yet to filter through.

Samuel Tombs, at Pantheon Macroeconomics, predicted GDP would hold steady between October and December and households faced a better 2024 when inflation is due to slow further, the tax burden will be lightened and welfare benefits go up.

Friday’s data showed households had a bigger savings cushion in the third quarter with the savings ratio, measuring the income that households saved as a proportion of their total available disposable income, rising to 10.1% from 9.5% in the second quarter as incomes rose more quickly than spending.

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