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UK at risk of recession after economy shrinks

The UK is at risk of recession after revised figures showed the economy shrank between July and September.

Gross domestic product, which measures the health of the economy, contracted by 0.1% after previous estimates suggested growth has been flat.

Meanwhile, there was zero growth between April and June, after it was first calculated to have risen by 0.2%.

A recession is typically defined as when the economy shrinks for two three-month periods – or quarters – in a row.

There have been concerns over the UK’s weak economic growth for some time, but the country has managed to avoid a recession so far.

Ashley Webb, UK economist at Capital Economics, said that the revised figures “may mean that the mildest of mild recessions started” in the third quarter between July and September.

But he added regardless of whether there was a “small recession”, the bigger picture was that economists expected economic growth to “remain subdued throughout 2024.”

Economic growth is a seen as a good thing for most people because companies become more profitable, more jobs tend to be created and firms can pay employees more money.

But when growth is stagnant, or a country is in recession, people tend to feel generally worse off.

During recessions unemployment can rise as companies cut back on spending, and graduates and school leavers may find it harder to get their first job.

With next year likely to see a general election, the economy is set to be a key battleground for all parties.

Chancellor Jeremy Hunt said the “medium-term outlook” for the UK economy was “far more optimistic than these numbers suggest”.

Earlier this week, data showed that inflation – which measures the rate of price rises – slowed by more than expected to 3.9% in the year to November, down from 4.6% in the previous month.

The Bank of England has, until recently, been raising interest rates in an attempt to slow inflation.

But the better-than-expected inflation rate has prompted speculation that the the Bank could cut its base rate in spring next year from the current level of 5.25%. Although at its last two rate-setting meetings, the Bank has said it is “too early” to consider reducing borrowing costs.

Mr Hunt said with inflation falling, the measures he outlined in his Autumn Statement would “deliver the largest boost to potential growth on record”.

But Rachel Reeves, the shadow chancellor, said the prime minister had “failed to grow the economy”.

Rishi Sunak has made growing the economy one of his key pledges. Downing Street said the promise will be met if the economy is bigger in the three-month period of October to December 2023 than it was in the previous three months.

It will not be clear until February whether the UK has entered or avoided recession when figures are released for the October to December quarter.

The Office for Budget Responsibility, the government’s official economic forecaster, has said it expects growth of 0.1% for the final three months of the year.

The latest GDP data from the Office for National Statistics (ONS) suggested that rising interest rates are weighing on consumer spending, which slowed over the period.

That is because while higher interest rates can reduce inflation and benefit savers, it can also affect economic growth by making it more expensive for consumers and businesses to borrow money.

The ONS said real households’ disposable income was estimated to have increased by just 0.4% between July and September, following growth of 2.3% over the three months before.

It also said it revised down its figures for the three months after additional information showed that businesses in film production, engineering and design as well as telecommunications were “all performing a little worse than we thought”.

It added there were “weaker performances” from smaller businesses, particularly those in the hospitality and IT sectors.

Darren Morgan, director of economic statistics at the ONS, told the BBC’s Today programme that the “broader picture” was that the economy “has been pretty much flat over the last year”.

The latest figures mean the UK has one of the weakest growth rates among other G7 advanced economies when comparing pre and post-Covid data.

Compared to October and December 2019 – the last quarter before Covid emerged and the UK went into lockdown in March 2020 – the UK is economy now 1.4% above its pre-pandemic level.

The UK had been 1.8% ahead of pre-Covid levels. Germany is the worst performing economy based on this measure.

“So after having leapfrogged France in the G7 rankings in the second quarter, the UK once again lags behind France and all other countries aside from Germany since the pandemic,” said Mr Webb.
Retail sales

Separate data from the ONS showed that retail sales grew by more than expected last month, with trading boosted by Black Friday discounts.

The amount of goods people bought rose by 1.3% in November compared to the previous month.

Black Friday fell on 24 November this year but retailers suggested that an early start to the sales event as well as wider discounting helped business. Sales at non-food stores rose by 2.3%.

John Edgar, chief executive of department store chain Fenwick, said Black Friday had “morphed into a Black November for many retailers”, which he did not think was a “good thing”.

“We’ve never gone down that route,” he said. “I think some people have taken similar views over time and have moved away from sort of that wider discounting.”

Mr Edgar said sales at the start of December had been a slower than expected, but added business had picked up in the past couple of weeks, with fragrances, handbags selling well as well as Jellycat soft toys “flying off the shelves”.