UK economy shrinks before election year

London – Britain’s economy unexpectedly shrank in the third quarter and flatlined in the previous three months, official data showed Friday, raising fears of a recession before an election due next year.

The downbeat news delivers a blow to Conservative Prime Minister Rishi Sunak, who trails opposition Labour leader Keir Starmer in the polls despite a sharp slowdown of inflation.

Gross domestic product (GDP) contracted 0.1 percent between July and September on sliding services output, down from a prior estimate of zero, the Office for National Statistics (ONS) said in a statement.

Activity was hit by the Bank of England’s aggressive interest-rate hikes, which are aimed at curbing elevated inflation and easing a cost-of-living crisis.

The ONS added that the economy turned flat in the second quarter, slashing its previous estimate of 0.2-percent expansion.

That sparked speculation over a potential recession which is defined as two straight quarters of negative economic growth.

“The fall in real GDP in the third quarter may mean that the mildest of mild recessions started,” noted Capital Economics analyst Ashley Webb.

“But whether or not there is a small recession, the big picture is that we expect real GDP growth to remain subdued throughout 2024.”

– Inflation eases –

Sunak was buoyed on Wednesday as separate ONS data showed inflation slowed sharply to the lowest level in more than two years.

The Consumer Prices Index hit 3.9 percent in November from 4.6 percent in the previous month, attaining the weakest level since September 2021.

The rate is nevertheless almost double the BoE’s target of 2.0 percent.

Yet core inflation — which strips out food and energy costs — eased only slightly to 5.2 percent in November from 5.6 percent in October.

The BoE last week froze its key interest rate at a 15-year peak of 5.25 percent — but warned that it will remain elevated to tackle stubbornly high consumer prices.

The central bank hit pause in September, November and December, snapping a series of 14 rate hikes as inflation slowed.

Those hikes dented economic activity because commercial banks pass on the higher borrowing costs to both businesses and consumers.

– ‘Retrenchment’ –

“Retrenchment by households and businesses in response to the jump in borrowing costs dragged down GDP on a quarter-on-quarter basis,” said Pantheon Macro economist Samuel Tombs.

In brighter news, the ONS also revealed on Friday that retail sales strengthened in November as shoppers snapped up cut-price bargains in the run-up to Christmas. 

Retail sales volumes increased by 1.3 percent in November. That comfortably beat market expectations of a 0.4-percent gain.

Darren Morgan, ONS director of economic statistics, said the overall UK economy was “little changed” over the entire year.

“The latest (GDP) data… show the economy performed slightly less well in the last two quarters than our initial estimates,” Morgan added.

“The broader picture, though, remains one of an economy that has been little changed over the last year.”

UK inflation had surged to a 41-year peak at 11.1 percent in October 2022, stoked by spiking energy prices after the invasion of Ukraine by major oil and gas producer Russia and sparking a cost-of-living squeeze.