UK on brink of major recession as economy shrinks by 0.2% between July and September

The UK economy shrunk by 0.2% between July and September in what experts warn is the first step towards a major recession.

The Office for National Statistics (ONS) reported a dip in output for September when gross domestic product (GDP) fell by 0.6%, in part due to the Queen’s funeral. It added to a 0.2% drop for the full quarter, which is lower than had been expected as the ONS revised its estimates for July and August.

A country is in recession when its economy shrinks for two three-month periods in a row and it is widely expected the UK will be in one by the end of the year. The reading comes just a week after the Bank of England published a forecast that the UK might be heading for an eight-quarter recession – the longest consecutive recession since reliable records began in the 1920s.

However, the Bank cautioned that this would only happen if it raises interest rates to around 5.2%, which the market was expecting at the time. It said it did not expect rates to reach such a high level, which suggests that the recession could be less drawn out.

A recession has been forecast in the UK for some time due to soaring food, fuel and energy prices, which is down to several factors, including the war in Ukraine.

The ONS said the contraction in the economy in the three months to September was driven by a decline in manufacturing, which was seen "across most industries", while customer-facing industries also "fared badly", with shops hard hit.

ONS director of economic statistics Darren Morgan said: “With September showing a notable fall partly due to the effects of the additional bank holiday for the Queen’s funeral, overall the economy shrank slightly in the third quarter.

“The quarterly fall was driven by manufacturing, which saw widespread declines across most industries. Services were flat overall, but consumer-facing industries fared badly, with a notable fall in retail.”

The September figure was worse than expected as analysts had forecast a 0.5% drop during the month, according to Pantheon Macroeconomics.

However, the ONS changed its readings for August and July, helping for the quarter as a whole. The economy was previously thought to have shrunk by 0.3% in August but that was revised to 0.1%. In July the economy had previously thought to have risen by 0.1%, but the ONS changed that to 0.3%

Responding to the latest figures, Chancellor Jeremy Hunt said: “We are not immune from the global challenge of high inflation and slow growth largely driven by Putin’s illegal war in Ukraine and his weaponisation of gas supplies.

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

Shadow chancellor Rachel Reeves described the latest GDP figures as “extremely worrying” and said it marks another failing of the Tory party.

The Labour MP said: “Today’s numbers are another page of failure in the Tories’ record on growth, and the reality of this failure is family finances crunched, British businesses left behind and more anxiety for the future.

“We’re already set to be near the bottom of global league tables on growth, but all the Tories offer yet again is austerity. Britain has so much potential to grow. We have the talent. We have the capacity.”