UK GDP data flashes recession warning

The size of the UK economy is now 0.2% smaller than before the pandemic in February 2020 after contracting in Q3. The UK could be in recession by year-end.

UK third-quarter GDP contracted by 0.2% quarter-on-quarter while September’s monthly figure fell by 0.6%, missing analysts’ expectations after a fall of 0.1% in August.

Service sector output fell by 0.8% in September while production and construction grew by 0.2% and 0.4% respectively during the month. However across July to September, production output slumped by 1.5%, the fifth straight quarterly decline. 

September’s monthly decline was hit by the extra bank holiday day for the State Funeral of Her Majesty Queen Elizabeth II when many retail outlets were shut, negatively weighing on the services sector. Imports and exports both fell in September while summer travel to and from the UK is still below 2019 levels. 

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On a quarterly basis, a 2.3% slide in manufacturing output across all sub-sectors drove the GDP figure lower. The size of the UK economy is now 0.2% smaller than pre-pandemic in February 2020.

With pressures from the cost-of-living crisis, the war in Ukraine and rising interest rates, the UK economy appears to be on track to fall into a recession by the fourth quarter, in what could be the longest period of economic contraction in at least a century. 

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Cable (the GBP:USD exchange rate) is trading just above the flatline, topping $1.17, extending gains after logging its best one-day performance since March 2020 at the height of the coronavirus market crash. However, this was mostly driven by US dollar weakness after yesterday's cooler inflation figures stateside prompted a surge in risk assets and a slide in the greenback. 

Chancellor Jeremy Hunt has a tough job ahead as he prepares to deliver his Autumn Statement next Thursday 17 November. The latest UK GDP figures make plugging the £60 billion black hole even more challenging with the prospect of diminishing tax receipts as the economic backdrop deteriorates.