Early official estimates indicate that the British economy fell by 0.2% in the third quarter, prompting the chancellor to warn that the “tough path ahead” will need “very difficult decisions.”
The number indicated the beginning of a recession.
The Office for National Statistics (ONS) recorded a decrease in output for September, placing the gross domestic product (GDP) in negative territory for the entire period of July through September.
The quarterly Gross Domestic Product is the value of all goods and services generated over three months and is a measure of economic health.
Officially, a recession is defined as two consecutive quarters of negative growth.
It would be met if the economy contracted in the fourth quarter as well.
Mr. Hunt stated, “I have no illusions about the difficulty of the path ahead, which will require incredibly painful decisions to restore confidence and economic stability.
“However, to achieve long-term, sustainable growth, we must control inflation, balance the budget, and reduce the debt.”
There is no other option.
Putin’s war is responsible
The chancellor, who is ready to make a vital fall statement next Thursday, attributed the rise in inflation to Russia’s war in Ukraine.
“We are not immune to the global dilemma of high inflation and sluggish growth, which is partly a result of Putin’s illegal conflict in Ukraine and his weaponization of gas supplies,” he said.
Long-term confidence is warranted by the inherent resiliency of the British economy, notwithstanding the tremendous volatility of the global economy.
Despite Mr. Hunt’s caution, the quarterly shrinkage was less severe than anticipated.
After the upwardly revised 0.2% increase in the second quarter, economists surveyed by Reuters anticipated a contraction of 0.5%.
The Bank of England said this week that the United Kingdom was already in recession, detailing a scenario in which the GDP might fall for eight consecutive quarters beginning in the third quarter of 2022.
This would make the recession the longest since records have been kept, although the decline would be less severe than after the 2008 financial crisis.
Effects of Queen’s demise
September had a substantial decline in GDP, which the ONS attributed to the Queen’s funeral-related bank holiday. Some firms closing or functioning differently on this day contributed to a 0.6% monthly contraction.
Even discounting the extra September bank holiday, the Confederation of British Industry (CBI) stated, “It is evident that underlying activity has decreased.”
The recession is being driven by the effects of decreased consumer expenditure in the cost of living issue, which has resulted in an economy that is 0.4% smaller than it was during the COVID-19 epidemic.
After the lockdowns, global prices began to rise because demand exceeded supply.
Then, in February, Russia invaded Ukraine, exacerbating the inflation situation by driving up the prices of numerous essential commodities such as oil, gas, wheat, and other consumables.
Consequences, including the impact of Western sanctions on Moscow, resulted in price increases that were passed on to consumers via supply chains.
Not only in the United Kingdom but also a significant portion of the rest of the world, rising interest rates to combat inflation have pushed up borrowing costs, further squeezing purchasing power.
After the Truss government’s mini-budget triggered a crisis of confidence in the UK’s public finances on financial markets, UK borrowers have experienced additional hardship, with mortgage consumers bearing the brunt of the blow.
A weakening pound has also contributed to inflation by making imports more expensive.
In the autumn statement, the chancellor faces an uphill climb.
Suren Thiru, economics director for the Institute of Chartered Accountants in England and Wales, said, “A contracting economy makes the autumn statement much more difficult as it means less tax revenue for the government, while aggressive spending cuts and tax increases would drive a longer and more damaging downturn.”
Mr. Hunt has been cautioned against adopting austerity measures.
According to Yael Selfin, chief economist at KPMG UK, a shift to a more austere fiscal policy predicted in next week’s autumn statement might contribute to prolonging any downturn.
Interest rate increases and the possibility of further increases by the Bank of England could intensify the deadlock in the UK housing market, leading to more significant spending cuts.
