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Falling GDP makes Autumn Statement even more challenging

Author: ICAEW Insights

Published: 11 Nov 2022

The latest official GDP estimate confirms that UK economic output contracted in the third quarter of the year as the UK slides towards recession.

The latest GDP figures released on Friday 11 November 2022 by the Office for National Statistics (ONS) reported that UK gross domestic product (GDP) is estimated to have contracted by 0.2% in Q3 2022, down from growth of 0.2% in the previous quarter. The level of quarterly GDP in the UK is now 0.4% below its pre-COVID-19 level in Q4 2019. The UK remains the only G7 economy where the quarterly measure of GDP has not returned to its pre-pandemic level.

On a monthly basis, UK GDP contracted by 0.6% in September, down from the decline of 0.1% in August (revised up from -0.3%). The monthly fall largely reflected the limit on activity from the extra bank holiday for the Queen’s State Funeral, which meant that most businesses closed or operated differently on the day.

“Fears of a recession are turning into reality,” said Suren Thiru, Economics Director for ICAEW in response to the latest GDP figures. “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.”

Services output

There was no growth in services output in Q3, down from the 0.2% increase in the previous quarter. Services output showed a monthly fall of 0.6% in September, which was affected by the additional bank holiday to mark the state funeral, following growth of 0.1% in August and 0.5% in July.

Industrial production output

Industrial production output fell by 1.5% in Q3, the fifth successive quarter of contraction. The latest fall was driven mostly by a drop in manufacturing output of 2.3%. All 13 of the manufacturing sub-sectors saw falls in quarterly output. The largest negative contribution came from the manufactures of basic metals and metal products and manufactures of chemicals and chemical products.

Household expenditure

Real household expenditure (after accounting for inflation) fell by 0.5% in Q3, which was driven by falls in spending on clothing and footwear, household goods and services, household furniture and equipment, communication, and food and transport.

Business investment

Business investment fell by 0.5% in Q3, down from the 3.7% increase recorded in Q2. Business investment is now 8.4% below its pre-COVID level, compared with overall UK GDP which is currently 0.4% lower. Declining spending on transport equipment amid ongoing supply chain disruption was a key driver behind the overall drop in business investment in the first quarter. All assets contributed positively to the jump in Q2 business investment with the largest contribution coming from 'other buildings and structures' (non-residential buildings, roads, bridges etc). 

UK trade

The UK's trade deficit for goods and services improved to a 2.0% of nominal GDP in Q3. However, there have been large movements in non-monetary gold over the last quarter, which can be volatile. UK export increased by 8.0%, though much of this was driven by increases in unspecified goods because of non-monetary gold. There were also increases in the exports of machinery and transport equipment and fuels. Imports fell by 3.2% in the latest quarter, driven by falls in chemicals, material manufactures, miscellaneous manufactures and unspecified goods.

Thiru said: “The decline in business investment highlights the chilling effect that soaring cost pressures and political and economic uncertainty are having on company spending on new projects. Weak business investment undermines the UK’s ability to tackle longstanding issues like regional inequalities and low productivity.

“A contracting economy makes the Autumn Statement much more challenging, because it means less tax revenue for the government, while aggressive spending cuts and tax rises would drive a longer and more damaging downturn.” 

For further information, read the GDP first quarterly estimate, UK: Q3 2022 and GDP monthly estimate, UK: September 2022

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