GDP falls 0.6% in September as recession looms

GDP fell by by 0.6% in September, after a fall of 0.1% in August 2022, driven by a fall in the services sector, according to the latest ONS statistics.

On a quarterly basis, GDP fell by 0.2% in the three months to September compared with Q2.

Services fell by 0.8% in September after growth of 0.1% in August 2022; the largest contribution to the fall came from a 3.2% fall in information and communication activity, and a 2.0% fall in wholesale and retail trade, and repair of motor vehicles and motorcycles.

Production grew by 0.2% in September 2022, after a fall of 1.4% in August; electricity, gas, steam and air conditioning supply grew by 1.5% and was the largest contributor to growth in production in September 2022.

Nicholas Hyett, equity analyst at Wealth Club, commented: "Were it not for the disruption caused by the Queen's funeral - during which many businesses shut - it's just possible the UK economy could have scraped a positive performance in Q3.

"But despite that perhaps surprisingly strong result, the Q3 GDP announcement is full of warning signs. Inflation is squeezing consumer spending, inward investment has fallen and supply constraints are restricting activity in the manufacturing and construction sectors. The mini-budget turmoil only kicked in right at the end of the period - and that is likely to have left Q4 off to a poor start.

"With consumers battening down the hatches for a tough winter and the government proposing substantial tax rises and spending cuts, we think the economy will shrink again in Q4 - officially pushing the UK into recession. With the Bank of England predicting recession could stretch well into late 2023 or even beyond, the Queen's funeral may end up marking the start of an "annus horribilis" for the whole of the UK."

Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, said: “UK recession is looking more likely as the economy shrank 0.2% in the three months to September. This essentially means we’re more firmly on track to be in a recession by the end of the year. The most notable downturns came from a slowing in the services sector, driven by a fall in consumer facing services. Production also fell sharply. The stark takeaway is that real household spending dropped 0.5%. This points to the tangible consequences of the cost-of-living crisis and is a trend likely to get worse before it gets better. It also has serious ramifications for companies relying on consumers spending on a discretionary basis.

"At the same time, we’re living in a topsy turvy land where bad economic news is likely to be taken well by markets. If economies show signs of slowing down, it means inflation has a better chance of petering out, which in turn means policy makers won’t be forced to keep interest rate hikes as aggressive, or keep tightening programmes going for as long. With that said, while the UK’s GDP did shrink, it was by less than expected. So, the jury’s likely to be out on whether this has been a deep enough dip to allay inflation fears just yet."

George Lagarias, chief economist at Mazars, added: “UK economic output shrank for the third month out of the last four. Manufacturing is weakening and consumer real incomes are suppressed by high inflation. The downward trend may well continue. While some headline inflation numbers may begin to look better from here on, we expect prices to remain elevated for some time, adding more pressures on demand. Should next week’s budget prove indeed ‘difficult’ for taxpayers, as expected, consumption will probably be further suppressed, and the Bank of England should begin to ponder the impact of a demand shock on the economy.”