UK economy contracts by more than expected in third quarter

The UK economy contracted by more than previously estimated in the third quarter and lagged further behind other advanced economies, as households struggled with high inflation.

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

UK output fell 0.3 per cent between the second and third quarter, a larger contraction than initial estimates of 0.2 per cent, the data showed.

In the third quarter, the economy was 0.8 per cent smaller than in the final quarter of 2019, before the Covid pandemic.

All other G7 competitors, by contrast, have regained ground lost during the pandemic. In the three months to September, the US economy was 4.3 per cent larger than in the fourth quarter of 2019, while eurozone output was up 2.2 per cent.

Gabriella Dickens, UK economist at the consultancy Pantheon Macroeconomics, warned that the UK economy would 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 the headwinds from both monetary and fiscal policy,” she said.

Last month, the OECD, a club of mostly rich nations, also predicted the UK would be the worst performing economy in the G20 bar Russia over the next two years.

The ONS also revealed that the non-pension saving ratio — the average share of income that is saved — increased to 1.8 per cent in the third quarter from 1.3 per cent in the previous one. The figures indicated that people are becoming more cautious in the face of rising economic risks.

The Office for Budget Responsibility, the UK fiscal watchdog, forecast last month that the savings ratio would fall to zero in the third quarter as households drew on their savings to cushion the impact of higher prices.

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

The ONS data showed that households’ real disposable income — the amount available to spend after taking inflation into account — fell 0.5 per cent between the second and third quarter.

It was the fourth consecutive fall as wages failed to keep up with inflation. With real income dropping or stagnating for most of the past three years, real household income was 2.9 per cent below the third quarter of 2019 — the largest decline over that time period since records began.

Column chart of % change over the same quarter 3 years before showing UK households' real disposable income suffers the largest 3-year fall on record

After accounting for inflation, household spending fell by 1.1 per cent 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, economist at audit, tax and consulting firm RSM UK, said the economy might be no larger 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 may prove to be deeper than that experienced in the early 1990s,” said Pugh.

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