UK economy shrinks at start of feared long recession

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LONDON, Nov 11 (Reuters) – Britain’s economy contracted in the three months to September at the start of what is likely to be a lengthy recession, adding to the challenge for finance minister Jeremy Hunt as he prepares to raise taxes and cut spending.

Economic output shrank by 0.2% in the third quarter, less than the 0.5% contraction analysts had forecast in a Reuters poll, Friday’s official data showed.

But it was the first fall in gross domestic product since the start of 2021, when Britain was still under tight coronavirus restrictions, as the economy struggles in the face of a severe cost-of-living crisis.

The Bank of England said last week that Britain’s economy was set to go into a recession that would last two years if interest rates were to rise as much as investors had been pricing.

Even without further rate hikes, the economy would shrink in five of the six quarters until the end of 2023, it said.

“Fears of a recession are turning into reality,” Suren Thiru, economics director for the Institute of Chartered Accountants in England and Wales, said.

“This fall in output is the start of a punishing period as higher inflation, energy bills and interest rates clobber incomes, pushing us into a technical recession from the end of this year.”

In September alone, when the funeral of Queen Elizabeth was marked with a one-off public holiday that shut many businesses, Britain’s economy shrank by 0.6%, the Office for National Statistics said. That was a bigger monthly fall than a median forecast for a 0.4% contraction in the Reuters poll and the largest since January 2021, when there was a COVID-19 lockdown.

But gross domestic product data for August was revised to show a marginal 0.1% contraction compared with an original reading of a 0.3% shrinkage, and GDP in July was now seen as having grown by 0.3%, up from a previous estimate of 0.1%.

The upward revisions to July and August’s GDP data mostly reflected new, quarterly figures on health and education output, alongside some stronger readings from the professional and scientific and wholesale and retail sectors, the ONS said.

The weak economic outlook provides a tough backdrop for next week’s budget statement by finance minister Hunt.

Responding to Friday’s data, he repeated his warnings that tough decisions on tax and spending would be needed to repair Britain’s public finances and the government’s credibility on economic policy after Liz Truss’s brief spell as prime minister.

“I am under no illusion that there is a tough road ahead – one which will require extremely difficult decisions to restore confidence and economic stability,” Hunt said in a statement.

“But to achieve long-term, sustainable growth, we need to grip inflation, balance the books and get debt falling. There is no other way,” he added.

(Reporting by William Schomberg and David Milliken; Editing by Kate Holton and Catherine Evans)

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