U.K. GDP fell 0.2% in Q3 as energy, cost-of-living crises bit

By Geoffrey Smith

Investing.com -- The U.K. economy shrank for the first time in six quarters in the three months through September, as Europe's energy crisis drove inflation to its highest in 40 years.

Gross domestic product fell 0.2% from the second quarter, a slightly better outcome than the 0.5% decline feared, thanks to a stronger-than-expected performance by industry in September. Industrial production rose 0.2% and manufacturing output was flat on the month, in contrast to declines forecast for both. That wasn't enough to stop GDP contracting 0.6% in September, however, as the period of official mourning for Queen Elizabeth reduced activity.

Even so, the figures put the country on track for what the Bank of England has warned could be the longest recession in decades, as roaring inflation and aggressive interest rate increases hurt both consumer and business sentiment.

The figures mean that the U.K. is the only one of the G7 economies where GDP is still below its pre-pandemic level, a testimony to the structural headwinds to growth created by Brexit, which has hurt the country's exporters and hollowed out its labor force.

Overall in the third quarter, service sector output was flat, driven by a fall in consumer-facing services. Retail sales volumes in particular fell 1.9% in the period, the Office for National Statistics said. Meanwhile. the production sector contracted by 1.5%, with all 13 sub-sectors of the manufacturing sector recording declines in output.

The fourth quarter is unlikely to bring much relief, due to the market turmoil that accompanied Liz Truss's brief spell as Prime Minister and the sharp rise in regulated household energy prices from October, which drove consumer confidence to a record low, according to figures from GfK.

"The very low level of demand indicators—the orders index of the composite PMI survey fell to just 46.8 in October, from 48.6 in September—and the extremely low level of consumers’ confidence suggests that GDP likely will fall again in Q4," said Pantheon Macroeconomics analyst Samuel Tombs in a note to clients. Tombs expects GDP to shrink another 1.5% next year before a modest rebound in 2024.

The figures had been widely discounted by markets in the days leading up to the release, and had little impact on sterling, which remained supported by Thursday's U.S. inflation report for October. That had triggered a sharp selloff in the dollar and an equally violent rally in U.S. stocks, feeding hopes that the Federal Reserve will end its monetary policy tightening cycle earlier than Chair Jerome Powell had suggested at his last press conference.