Yahoo Finance UK economy shrinks in August as recession fears mount
The UK economy unexpectedly contracted for the first time in two months in August, falling by 0.3% and fuelling recession fears.
According to the Office for National Statistics (ONS) on Wednesday, the surprise decline was driven by a sharp fall in manufacturing and a small contraction in services, which slowed down the oil and gas sector.
Analysts had expected economic growth to flatline, despite increasing pressure on businesses and households thanks to runaway inflation and high interest rates.
It comes as July's growth was revised down from 0.2% to 0.1%. UK gross domestic product (GDP) is now only 0.5% above its pre-COVID level in the fourth quarter of 2019.
With the small downward revision to July, the economy contracted in the last three months as a whole, the ONS said. It added that lots of other customer-facing businesses like retail, hairdressers and hotels were "faring relatively poorly".
Health also contributed to the decline, with a drop in the number of hospital consultations and operations, while sports events had a slower month after a strong July, However, these falls were partially offset by a stronger than usual summer performance for many professional services such as lawyers, accountants and architects.
Read more: IMF forecasts more pain for the UK: prices will remain higher for longer
But the decline now means the economy is likely to contract in the third quarter, marking the start of a recession. A recession is two consecutive quarters of shrinking economic output.
It comes as the Bank of England (BoE) has already warned the UK will fall into recession towards the end of the year.
Both investors and economists will remain firmly fixed on chancellor Kwasi Kwarteng and Threadneedle Street as they look to restore confidence and stabilise the government bond market.
"To build business confidence, the government must rapidly provide more detail on its fiscal policies and supply side reforms, particularly at a time when businesses face the twin crises of rising interest rates and high inflation," David Bharier, head of research at the British Chambers of Commerce, said.
Kwarteng is now set to hold the autumn budget on 31 October after calls to bring it forward from its original November date.
Watch: What is a recession and how do we spot one?
The Financial Times on Wednesday also reported that the central bank has signalled privately to bankers that it could extend its bond-buying programme past this Friday’s deadline.
Marcus Brookes, chief investment officer at Quilter Investors, said: "Considering the daily headlines centred on Britain’s finances it comes as no surprise that after a surprise bounce back in growth in the UK in July we’re faced with a disappointing set of results in August,”
“The BoE continues to face the incredibly difficult task of guiding the country through this uncertain period where it finds itself in a rock and a hard place by raising rates to meet inflation but embarking on a gilt buying operation to help steady the markets following the turmoil precipitated by the mini budget.”
Meanwhile, Paul Dales, chief UK economist at Capital Economics, said: "We suspect that GDP in September will fall by around 0.6%, mainly due to the extra drag from the bank holiday for the Queen’s funeral. That would result in a 0.6% fall in GDP in the third quarter as a whole.
"But our main concern is that the duel drag from high inflation and rising interest rates will mean that GDP contracts in the fourth quarter and throughout most of next year too. We are forecasting a recession involving a peak-to-trough decline in GDP of around 2%".
