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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

FTX files for US bankruptcy protection, CEO Bankman-Fried resigns – as it happened

United Kingdom GDP Recession United States Economy Sanjay Raja Inflation Interest Rates
Sam Bankman-Fried has resigned as CEO of FTX.
Sam Bankman-Fried has resigned as CEO of FTX. Photograph: Sipa US/Alamy

Closing post: A Lehman moment?

Time to wrap up, after a busy day which started with the UK heading towards recession and ended with the collapse of a crypto empire valued at $32bn just months ago.

A quick recap

Crypto exchange FTX has filed for bankrupcy protection, amid warnings the embattled industry faces a 2008-style crisis.

On Friday, Changpeng Zhao, the founder of FTX’s rival Binance, warned the crypto market faced a 2008-style crisis with more failures to come. Speaking before FTX filed for chapter 11 protection, he told a conference in Indonesia that the global financial crisis was “probably an accurate analogy” to this week’s events, the Financial Times reported.

“The events of the past week have precipitated a Lehman Brothers moment for the entire crypto economy,” said Carol Alexander, a professor of finance at the University of Sussex.

“The contagion could last for weeks, with many other firms going bankrupt.”

The UK is on the brink of recession, after the economy shrank by 0.2% in the third quarter of 2022.

Manufacturing was worst hit, while the service sector stagnated – with the UK performing worse than other G7 nations over the quarter.

Economists said the downturn was the start of a recession that could last a year, with chancellor Jeremy Hunt predicting a ‘tough road ahead’.

Plus in other news:

Back in the UK, a Bank of England policymaker has declared that interest rates already higher than needed to bring inflation into line.

Silvana Tenreyro, a member of the BoE’s Monetary Policy Committee, told a conference in London that “policy was already in restrictive territory” before this month’s MPC meeting, where her colleagues voted to hike rates by 0.75 percentage points to 3%

Tenreyro, who argued in vain for a mere 0.25 percentage point rise, from 2.25% to 2.5%, says today it is too early to see the full effects of “the fastest tightening in policy in the MPC’s history”.

The FT has more details.

Summers says FTX Meltdown Has ‘Whiffs’ of Enron

Former Treasury Secretary Lawrence Summers has compared the meltdown of FTX to the Enron scandal two decades ago.

Speaking on Bloomberg TV, Summers called for an expansion in the number of forensic accountants.

Summers told “Wall Street Week” with David Westin.

“A lot of people have compared this to Lehman. I would compare it to Enron,”

“The smartest guys in the room. Not just financial error but -- certainly from the reports -- whiffs of fraud. Stadium namings very early in a company’s history. Vast explosion of wealth that nobody quite understands where it comes from.”

Customers of FTX’s US entity may be startled to find it is part of the bankrupcy filing.

Just yesterday, Sam Bankman-Fried tweeted that FTX US was 100% and “was not financially impacted by this shitshow.”

He pledged that updates on its future were coming, which has proved true…

Updated

Reuters points out that FTX’s collapse also raises questions about the future of smaller firms like BlockFi and bankrupt crypto lender Voyager Digital.

They signed rescue packages with FTX after the spectacular crash of TerraUSD in May pushed many companies to the brink of collapse.

Updated

FTX customers who can’t access their funds should seek legal advice, recommends Louise Abbott, cryptocurrency and asset recovery partner at Keystone Law.

A liquidator will soon be appointed to manage and investigate the affairs of company. The exchange’s terms of business state that client funds do not belong to FTX Trading, and so may well fall outside of company property for the purposes of any liquidation.

“Any victim unable to withdraw funds stuck within FTX should immediately seek legal advice. Any claim under the firm’s terms of service could be governed by English Law.

It is vital any persons impacted by this contact a crypto specialist lawyer straight away.”

Crypto holders and FTX clients left 'in a bad place'

The collapse of FTX may push the mainstream adoption of crypto acceptance back years, or even stymied it entirely.

So argues Jack Amy, portfolio analyst at digital wealth manager Moneyfarm.

He warns that it will be hard for customers to get any recourse on their crypto losses.

“In our view, it looks doubtful that regulators will want to touch crypto for some time. FTX were known for making a big push with regulators - with the aim of bringing the crypto ecosystem into the mainstream.

“Little is known about Binance and its senior management team. Regulators and institutional investors don’t like this sort of uncertainty. FTX’s losses may well have pushed mainstream crypto acceptance back years or stymied it entirely.

“So, where does this leave crypto holders and FTX clients? In short - in a bad place. FTX clients can’t withdraw their funds from the exchange. Any holders of even the smallest amount of cryptocurrency likely saw 15% or more wiped off its value.

Ultimately, in a world with no regulator, it will be difficult for clients to get any recourse on cryptocurrency losses.”

The downfall of FTX, one of the largest crypto exchanges, has created havoc, says Marcus Sotiriou, analyst at the publicly listed digital asset broker GlobalBloc.

The knock-on effects for the rest of the industry remains to be seen, yet so far, we have seen BlockFi on the brink of bankruptcy. According to FTX, about 130 additional companies affiliated with FTX -- including FTX US and Alameda Research - have also begun the bankruptcy process.

So far, Bitcoin has not reacted too negatively to this news, as it stays around $17,000 - the market could enjoy the fact it now has more clarity than a week ago.

However, the severity of the contagion to come could have damaging effects for the crypto ecosystem.

Sam Bankman-Fried has said he’s “really sorry” that the FTX group have filed for bankrupcy protection.

In a Twitter thread, Bankman-Fried says he going to “work on giving clarity on where things are in terms of user recovery” as soon as possible. FTX halted withdrawals earlier this week after processing billions of dollars worth of requests, as worried customers rushed to take out their money.

He also says he’s optimistic that the new CEO, restructuring expert John J Ray III, and others can “help provide whatever is best” for the stricken group.

Full story: Cryptocurrency exchange FTX files for bankruptcy protection in US

The world’s second largest cryptocurrency exchange, FTX, has filed for bankruptcy protection in the US and the founder, Sam Bankman-Fried, has resigned as chief executive.

In a statement, FTX said a range of related businesses including Alameda Research, a trading firm also owned by Bankman-Fried, had filed for chapter 11 proceedings “in order to begin an orderly process to review and monetise assets for the benefit of all global stakeholders”.

The statement added that Bankman-Fried, 30, had resigned as CEO of FTX Group.

FTX’s precipitous fall from the top of the crypto industry started last week when reports emerged that the balance sheet of Alameda was loaded with billions of dollars worth of FTT, the exchange’s crypto token, implying that both businesses were vulnerable to a decline in the token’s value.

A declaration on Sunday by Binance, the world’s biggest crypto exchange, that it was selling its FTT holdings was followed by a bank-style run on FTX as customers rushed to withdraw a reported $6bn in 72 hours.

FTX’s new CEO, John J. Ray III, is a noted restructuring specialist.

A Chicago lawyer, his most famous role was overseeing the liquidation of Enron after its bankrupcy. He also worked on Nortel Networks and Overseas Shipholding Group after their collapses.

Today, Ray explains that:

“The immediate relief of Chapter 11 is appropriate to provide the FTX Group the opportunity to assess its situation and develop a process to maximise recoveries for stakeholders,”

Updated

Shares in some crypto-focused companies are also falling followin FTX’s bankrupcy filing.

Crypto bank Silvergate Capital are down 5%, while bitcoin miners such as Riot Blockchain (-4%) and Hut 8 Mining (-6.5%) are also taking a hit.

Updated

It's the biggest destruction of wealth in crypto history

The FTX collapse shows that regulators must monitor the crypto space more closely, says Naeem Aslam, chief market analyst at Avatrade.

The biggest destruction of wealth has happened today in the history of crypto as FTX files for bankruptcy, leaving its customers hanging high and dry.

This is the best time for regulators to come and start tightening up the grip, we can no longer afford to have different privileges for crypto exchanges and the whole space needs to be monitored by the regulators.

Aslam predicts that bitcoin could continue to slide, if the fall of FTX causes a ‘domino effect’:

As for bitcoin, this is certainly another major set back and this is causing pressure on the price, and the chances are that we may see the price moving toward the 13K level.

Bitcoin is already down around 63% so far this year, having peaked at $69,000 a year ago.

News of FTX’s bankrupcy filing has knocked crypto currencies.

Bitcoin fell up to 7% to $16,361, close to yesterday’s two-year low.

Updated

The downfall of FTX, and Sam Bankman-Fried, has been astonishing – both in its speed and its scale.

Earlier this year, the exchange was valued at $32bn, while Bankman-Fried’s wealth peaked at $26bn in March.

Even at the start of this week, he was worth $16bn, but that entire fortune has now been wiped out –- one of history’s greatest-ever destructions of wealth.

The Bloomberg Billionaires Index had slashed its value of FTX’s US business -- of which Bankman-Fried owns about 70% -- to $1.

Sam Bankman-Fried’s trading firm Alameda Research, which sat at the heart of his digital-asset empire, is also part of the bankruptcy protection, FTX says.

There have been reports that Alameda was partly behind FTX’s problems and reportedly owes FTX roughly $10bn.

The US Securities and Exchange Commission and Justice Department are reportedly investigating FTX following its sudden implosion this week.

The investigation into Bankman-Fried and FTX - by those in the crypto world as well as securities regulators – were examining whether the firm used customers’ deposits to fund bets at Alameda Research.

In traditional markets, brokers are expected to separate client funds from other company assets. More here:

FTX to file for U.S. bankruptcy protection, CEO Bankman-Fried resigns

Important developments in the crisis gripping the cryptocurrency sector.

Crypto exchange FTX has announced it is commencing bankruptcy proceedings in the United States, after efforts to arrange a rescue floundered.

Sam Bankman-Fried, founder of the company, is resigning from his role as chief executive officer. He’ll stay to help with an “orderly transition”.

New CEO John J. Ray III said that FTX has “valuable assets that can only be effectively administered in an organized, joint process”.

The move comes days after larger rival Binance walked away from a proposed acquisition, after FTX experienced the cryptocurrency equivalent of a bank run.

That left FTX scrambling to try to raise billions of money from investors and rivals to plug a financial hole in the exchange that could be as deep as $8bn, according to multiple reports, as customers rush for the exit.

The move to file for bankrupcy protection comes after the Bahamas securities regulator froze the assets of the Bahamas subsidiary of FTX, as the world’s second largest cryptocurrency exchange struggles for survival.

The Securities Commission of the Bahamas said on Thursday it had frozen the assets of FTX Digital Markets and related parties, as well appointing a liquidator for the unit.

“The powers of the directors of FDM have been suspended and no assets of FDM, client assets or trust assets held by FDM, can be transferred, assigned or otherwise dealt with, without the written approval of the provisional liquidator,” the commission said.

Updated

Despite the looming recession, the pound has risen to its highest level against the US dollar since late August today.

Sterling has gained half a cent to $1.176, adding to the three cent surge on Thursday.

The dollar has also dropped against the euro, as traders continue to hope that the worst of America’s inflation surge is over, with CPI dropping to 7.7% in October, from 8.2%.

Analysis: manufacturing shrank 2.3% as government 'abandons' sector

When the minor ups and downs caused by the extra bank holiday for the Queen’s funeral are stripped out of the latest GDP figures, it is clear the long decline of Britain’s industrial base has accelerated.

Protected by the government through the coronavirus pandemic, this year, factory owners say ministers have abandoned them to cope with a long recession without so much as a glance in their direction.

The squeeze from inflated materials costs, a shortage of workers that has pushed up wages and declining demand for their products is especially crippling while the government spends its time navel-gazing, they say.

As the British Chambers of Commerce makes clear in its response to figures showing the economy shrank by 0.2% in September, there is another factor damaging the outlook for manufacturing and exporters more generally, and that is Brexit….

More here:

There is an ‘elevated risk’ that the UK economy also contracts in the fourth quarter of this year, the NIESR think tank says.

It predicts the UK economic situation will worsen, after the economy shrank 0.2% in the third quarter.

Paula Bejarano Carbo, NIESR data analyst, explains:

“Today’s ONS estimates confirm a production-driven contraction in GDP in the third quarter of this year, with a quarter-on-quarter fall of 0.2 per cent. We are currently expecting GDP to be flat in the fourth quarter of this year.

However, given that October PMIs recorded figures below the neutral 50 for both the services and manufacturing sectors, consumer and business confidence is plummeting, and higher-than-expected inflation and interest rates continue to squeeze budgets, the risk of a contraction in GDP in the fourth quarter of this year remains elevated.

Whether the Chancellor’s upcoming Autumn Statement will alleviate or aggravate current recessionary risks will become clearer next week.”

Q3 was also a tough three months for Hong Kong.

Hong Kong’s economy shrank by 2.6% in the third quarter, as growth was dragged down by demand and ongoing pandemic restrictions

Gross domestic product shrank by 4.5% in the July-to-September period compared to the same quarter a year ago, the biggest drop in over two years. That’s much worse than economists’ forecasts for a 0.8% decline, following a 1.3% drop in Q2.

Despite the looming recession, Heathrow has said it is prepared for the biggest Christmas getaway in three years.

The airport has promised that passengers will not have to face a return of the daily cap that was introduced as summer holiday travel descended into chaos.

Europe’s busiest airport, which said last month that on the busiest travel days over the festive period travellers may have to fly outside peak times to manage the festive rush, said it was working on contingency plans for potential strike action over the period.

“We have been working with airlines and their ground handlers to prepare for the Christmas peak, and have a good plan, which will not require any passenger cap,” Heathrow said.

“We are aware of potential strike action at a number of organisations, including a national Border Force strike. We are supporting organisations on contingency plans to minimise any impact, and encourage all parties to put the interests of passengers first.”

Focus pay rises on low earners, says Bank of England governor

The governor of the Bank of England has said that high inflation is hitting lower income households the hardest, as they spend more of their income on “essentials of living”, like food and energy.

Andrew Bailey has told Newcastle’s The Journal newspaper that:

“Inflation is bad for the least well-off generally and this inflation is particularly bad,”

Bailey added that it will take up to two years to get UK inflation under control.

In the meantime, businesses should direct pay rises to lower paid workers in this environment, the governor suggested.

Bailey said:

“Quite a few businesses are saying to me that they are doing more to direct their pay rises to the lower paid, and I think that is sensible.

Updated

Here are some sobering examples of how the UK economy has struggled over recent years, from Resolution Foundation’s Torsten Bell:

First, a chart showing how growth has lagging behind fellow G7 nations….

….second, the failure to recover growth lost since the financial crisis began in 2007…

…and third, the alarmingly weak business investment:

Today’s GDP report is full of warning signs about the weakening economy, says Nicholas Hyett, equity analyst at Wealth Club

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.

Hyett predicts that the UK economy will contract in the current quarter, meaning it would be officially in recession:

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.”

The UK is likely to be one of the worst-performing developed economies next year, warns Sam Miley, senior economist at the CEBR.

Miley predicts the UK will shrink for four quarters – twice as long as the expected eurozone recession:

“The UK economy finds itself on a weak footing as a result of both demand- and supply-side headwinds.

Cebr expects the contraction seen in Q3 to be the first of four consecutive quarters of decline, meaning the economy is now facing the beginning of a recession. On an annual basis, this is set to induce a GDP fall of 1.2% in 2023.

Cebr expects the UK to be one of few developed economies to face a contraction across next year as a whole.”

Eurozone recession is here, warns EC

The eurozone is also poised to fall into recession as double-digit inflation and the ongoing disruption caused by the Ukraine war hits growth.

In its latest economic forecasts, the European Commission has predicted that the euro economy is shrinking in the current quarter.

GDP is expected to keep contracting in January-March 2023, due to the energy price surge caused by the Russian invasion of Ukraine.

European Economic Commissioner Paolo Gentiloni:

“We are approaching the end of a year in which Russia has cast the dark shadow of war across our continent once again,”

This recession isn’t expected to push up unemployment much, though. The jobless rate is forecast to hit 7.2% in 2023, from 6.8% this year.

Inflation is expected to fall from 8.5% this year to 6.1% in 2023, then 2.6% in 2024.

Redrow: Financial instability hurt housing market

Housebuilder Redrow has warned it faces difficult trading conditions due to the recent financial turbulence caused by the mini-budget.

Shareholders gathering for Redrow’s annual general meeting in Ewloe, Flintshire, this morning heard that the market instability had hurt the housing sector.

Richard Akers, Redrow’s chairman, explained:

“We entered the new financial year in a strong position with a record order book of £1.44bn. The housing market had returned to normal following the elevated sales rate in the previous two years.

However, recent instability in financial markets has had a negative impact on the housing market and the business has had to adapt to the changing economic outlook.

Redrow expects revenues this year to be flat – it currently has forward orders worth £1.36bn, down from £1.49bn at the same time last year.

Reservations on properties are lower than last year, but Redrow’s average selling price is up 6.9% to £483,000.

Emily Fry of the Resolution Foundation has analysed today’s trade data, and shows that the UK has joined the global slowdown – having lagged the post-pandemic global recovery in trade.

Slowdown hits UK goods trade

UK trade with the rest of the world declined in September, with imports and exports both dropping.

William Bain, head of trade policy at the BCC, says UK firms are suffering from the global downturn:

“The effects of higher inflation and reduced consumer spending globally on UK trade are growing clearer as both imports and exports of goods in September slowed.

“On the plus side, UK services trade in September held up, although areas such as hospitality are being hit at home, the demand for financial and business services products abroad remains stronger.

Imports dropped by 5%, driven by a drop in gas imports and in the cost of imported oil.

Fuel imports from outside the EU, principally Norway, fell the most in September - down by £1.3bn.

Imports of goods from EU countries tumbled by 7.3%, lead by a drop in the value of imports of chemicals and fuel.

UK exports declined by 4.7% in the month, with shipments to EU countries falling by 5% and those to non-EU countries down 4.2%.

UK trade data to September 2022

Bain urges the goverment to counter these strengthening headwinds for goods trade:

“To have any hope of expanding goods export opportunities for firms, the UK’s Export Strategy must be reinforced.

This and other measures, such as negotiating reduced red tape in the EU trade agreement, will help mitigate the impacts of rising inflation on consumers and businesses at home.”

TUC: Hunt must protect workers and help economy

The TUC are urging Jeremy Hunt to use next week’s autumn statement to protect pay and shield workers from the misery of recession, rather than plunge the country into more austerity.

TUC General Secretary Frances O’Grady warns the chancellor not to repeat the errors of George Osborne and David Cameron:

“The Tories crashed the economy – and now the country is on the brink of recession. As the government prepares for the Autumn Statement, ministers need to act now to boost the economy and to protect workers from soaring prices and the threat of one million lost jobs.

“Sunak and Hunt must not repeat the mistakes of Cameron and Osborne. Tory cuts over the past 12 years have meant the slowest recovery for a century.

“The government has a choice. Rather than a recession, they should choose more funding for the vital public services like schools and our NHS, pay rises for our dedicated public servants that match the cost of living, and investment in green tech to meet the challenge of net zero.

This is how you build a fairer and more resilient economy.”

The BBC’s Faisal Islam points out the UK has lagged behind the rest of the G7 over the last three years:

Alarmingly, UK business investment continued to fall in the last quarter.

Spending on capital goods such as new factories, machinery & vehicles fell by 0.5% in July-September, and is a startling 8% lower than before the Covid-19 pandemic began, according to today’s GDP report.

The Bank of England’s agents around the UK have reported that firms delaying investments because of uncertainty and tighter financial positions.

This is bad news for the UK’s economic outlook, as business investment lifts productivity and long-term growth.

UK lags behind other G7 countries

The UK fell behind other major advanced economies in the last quarter.

The UK is the only member of the G7 whose economy shrank in July-September (although Japan is yet to report its Q3 GDP data).

In contrast, Germany and France kept expanding despite the energy crisis, while the US returned to growth.

Here’s how G7 nations fared in the July-September quarter:

  • Canada: +0.4% (according to advance data)

  • France: +0.2%

  • Germany: 0.2%

  • Italy: +0.5%

  • United States: +0.6%

  • United Kingdom: -0.2%

We should remember the UK’s economy was pulled down by the bank holiday for the Queen’s state funeral, which caused around half of the 0.6% drop in GDP during September.

But still, Pantheon Macro’s Sam Tombs says the UK is a ‘global outlier’ – the only G7 country to have not seen GDP recover fully to its pre-Covid (Q4 2019) peak.

Updated

Full story: UK heads for long recession as economy shrinks by 0.2%

Britain’s economy shrank by 0.2% in the three months to September, in what is expected to be the beginning of a long recession.

In its first estimate of growth in the third quarter, the Office for National Statistics (ONS) presented a bleak picture of the economy before next week’s autumn statement from the chancellor, Jeremy Hunt.

Activity in the service sector ground to a halt, with zero growth over the quarter, driven by a fall in consumer spending as households came under mounting pressure from the cost of living crisis.

UK GDP data

Growth in the construction sector slowed, while factory output slumped because of a sharp decline in manufacturing as some businesses continued to struggle with supply chain difficulties and shortages of key materials.

The Bank of England expects the latest gross domestic product figures to be the start of a prolonged UK recession – as rising interest rates and the cost of living take their toll on activity – lasting until the end of next year. Another negative growth figure for the final three months of 2022 would confirm a technical recession. The economy grew by 0.2% in the second quarter of 2022.

Hunt said that the world economy was facing a period of “extreme turbulence” but that the “fundamental resilience of the British economy is cause for optimism in the long run”.

He added:

“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.”

The ONS said the performance of the economy in the three months to September had been affected by the extra bank holiday for the funeral of Queen Elizabeth II, which led to weaker activity.

Hunt: We've learned you can't do unfunded spending or borrowing

Chancellor Jeremy Hunt says he’s learned the lessons of Kwasi Kwarteng’s mini-budget:

Speaking to Sky News, Hunt responded to Kwarteng’s comments yesterday that Liz Truss’s government can’t be blamed for the black hole in the nation’s finances.

Hunt says:

When we produced a fiscal statement that didn’t show how we were going to bring our debts down over the medium term, the markets reacted very badly.

We’ve learned that you can’t fund spending or borrowing without showing how you’re going to pay for it. And that’s what we’re going to do.

Hunt added that people and businesses suffer if the UK doesn’t show it is fiscally responsible:

“Well, there is some choice over the rules, or the fiscal rules, that you choose to follow, but there isn’t uncertainty about a basic choice we make as a country, which is whether we’re going to pay our way.

“And if we don’t give that certainty to the world, what we’ll see is higher interest rates, higher inflation, more instability, and more worries for families and businesses.

“And that’s why it’s so important to show the world that we are a country that pays our way.”

Hunt: disappointing but not entirely unexpected that UK could fall into recession

Chancellor Jeremy Hunt says he wants to protect vulnerable businesses and families through the downturn.

Soeaking to broadcasters this morning, Hunt was asked of the UK is heading into recession.

He said:

“Well, the Bank of England says we are likely to be in recession. This is disappointing but not entirely unexpected news.”

Hunt added that he will present a plan next week to get through this ‘difficult period’:

“According to the International Monetary Fund, around a third of the world’s economy is in recession this year or will be in recession next year.

“And that is principally but entirely because of very high global energy prices. We are not immune to that in the UK and what we need is a plan that shows how we are going to get through this difficult period. If it is a recession, how are we going to make it shallower and quicker, so that we can protect businesses who are really struggling, as these figures show.

“But also give families so hope that we’ll get through to the other side with the most vulnerable people protected.”

Updated

Today’s GDP figures are “dreadful news”, says the Federation of Small Businesses.

FSB chairman Martin McTague warns the outlook is extremely bleak:

“Confirmation of a shrinking economy is dreadful news for small businesses that have been facing increasing recessionary pressures for months now.

“Lower levels of reserves and resources mean they are more vulnerable to downturns, and at a time when confidence is deteriorating in both consumers and businesses, the outlook for the UK economy is now very bleak indeed.

“The fall in GDP is one headline figure made up of countless bits of disappointing news for small businesses across the country - a new venue or premises they couldn’t open, a contract which ended unexpectedly, a staff member they had to let go.

“Taken together, the impact on the economy is huge and the Government must demonstrate that it has grasped the scale of the issue.”

Updated

The UK is embarking on a ‘classic slide’ into recession, says Guy Foster, chief strategist at wealth manager RBC Brewin Dolphin.

“Economic growth was less bad than feared but the pressure from rising interest rates will intensify going forward, house prices have started falling and the labour market is beginning to ease. The UK economy is showing the signs of a classic slide into recession.

“The good news is that there is some evidence of global inflationary pressures easing, and without serious imbalances in terms of excess household borrowing, the economy should also be able to recover when policy eventually eases.”

The scale of the looming UK recession will partly depend on how much support the government provides for energy bills, says Dutch bank ING.

ING predicts UK GDP will fall by 2% by the middle of 2023, a comparable hit to the 1990s recession.

But a lot will depend on what Jeremy Hunt announces next week, and what help will be available once the energy price freeze ends in April.

ING predicts that bills will soar for most households once the six-month package of help ends, after Hunt ripped up Liz Truss’s two-year freeze.

The Chancellor has signalled support for households will become more targeted in a bid to make the policy less costly. The challenge here is that there’s no easy way of targeting support efficiently, and it may be that the Chancellor simply differentiates households by whether they receive means-tested income support. The upshot is that we could see the majority of households shift back to paying the Ofgem-regulated price, which is updated quarterly.

The sharp fall in wholesale gas prices could see most households paying £3,300 on average during FY2023, compared to £2,500 annually under the government guarantee. That would equate to roughly 9% of household disposable income and would add a further drag to overall economic activity next summer.

Austerity mark 2 would compound the crisis - economist

Jeremy Hunt may warn of a ‘tough road ahead’, but it’s clear that a blizzard of spending cuts and tax increases will further hurt growth.

A bout of ‘austerity mark 2 ‘ would compound the cost of living crisis, and rising borrowing costs, says Thomas Pugh, economist at audit, tax and consulting firm RSM UK.

‘Looking ahead, the squeeze on household real incomes will intensify as rising interest rates join soaring inflation. What’s more, the upcoming round of austerity, we’re expecting Chancellor Hunt to impose about £50bn of tax rises and spending cuts, means that government consumption will start to be a drag on GDP while the huge rise in business borrowing costs will weigh heavily on investment.

In addition, a global economic recession means that large rises in export volumes are unlikely to continue.

‘All this suggests that the contractions in GDP are not only likely to continue, but will get worse through the first half of next year.

The 0.2% drop in GDP in July-September marks the start of the recession, predicts Paul Dales of Capital Economics.

He predicts the economy will shrink for around a year:

As the effects of the extra [September] bank holiday will have dropped out in October, GDP may rebound and turn positive again that month and at the start of Q4.

But Q4 is also when the drag from high inflation will be particularly large and the cumulative effect from rising interest rates will be building. We think these effects will mean that GDP continues to fall for about a year, resulting in a peak-to-trough decline in GDP of around 2%.

UK on course for quickest return to recession since 1975

The UK is on course for its quickest return to recession in almost half a century, reports the Resolution Foundation.

They point out that the UK only emerged from the pandemic downturn eight quarters ago.

If the economy shrinks in Q4, it would be the fastest return to recession since the mid-1970s, when there were only four quarters between recessions in 1974 and 1975.

James Smith, research director at the Resolution Foundation, says Jeremy Hunt must try to prevent the cost of living crisis getting any worse:

“Falling consumer spending has caused the economy to shrink in the third quarter of 2022. This has set Britain on course for the quickest return to recession in nearly half a century.

“These latest figures provide a sobering backdrop to the Autumn Statement next week. The Chancellor will need to strike a balance between putting the public finances on a sustainable footing, without making the cost-of-living crisis even worse, or hitting already stretched public services.”

Falling GDP makes Hunt's task even harder

A shrinking economy will make it even harder for Jeremy Hunt to raise tax revenues, points out Victoria Scholar, head of investment at Interactive Investor.

With pressures from the cost-of-living crisis, the war in Ukraine and rising interest rates, the UK economy appears to be on track to fall into a recession by the fourth quarter, in what could be the longest period of economic contraction in at least a century.

Chancellor Jeremy Hunt has a tough job ahead as he prepares to deliver his Autumn Statement on Thursday.

The latest UK GDP figures make plugging the £60 billion black hole even more challenging with the prospect of diminishing tax receipts as the economic backdrop deteriorates.”

Labour: Tories failing on growth

Rachel Reeves MP, Labour’s Shadow Chancellor, pins the blame for the looming recession firmly on the government.

She says:

“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.

“Britain’s unique exposure to economic shocks has been down to a Conservative led decade of weak growth, low productivity and underinvestment and widening inequality.

“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. Labour’s Green Prosperity Plan, our modern Industrial Strategy, our plan to boost skills and our active partnership with business will get our economy firing on all cylinders.”

Updated

Hunt: tough road ahead

The news that Britain’s economy is halfway into recession, after shrinking 0.2% in the last quarter, is a sickener ahead of next week’s autumn statement.

Chancellor Jeremy Hunt has blamed the invasion of Ukraine, and Russia’s ‘weaponisation’ of gas suppliers, for hitting growth and pushing up inflation.

Hunt also warns there is a ‘tough road ahead’, and some ‘extremely difficult decisions’ (a sign he is determined to slash spending and hike taxes, even though that will hurt the economy).

Hunt says:

“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.

“While the world economy faces extreme turbulence, the fundamental resilience of the British economy is cause for optimism in the long run.”

Updated

UK economy smaller than before Covid

The UK economy is smaller than it was before the Covid-19 pandemic began.

GDP was estimated to be 0.2% below its pre-coronavirus levels of February 2020, following the 0.6% drop in GDP in September.

UK GDP growth to September 2022
UK GDP growth to September 2022 Photograph: ONS

In contrast, the US economy returned to its pre-Covid levels in the middle of 2021 (although its GDP did then fall in the first half of 2022).

Updated

Reuters has spotted that the ONS have revised up earlier GDP figures, to show the economy was in better health over the summer:

Gross domestic product data for August was revised to show a marginal 0.1% contraction compared with an original reading of a 0.3% shrinkage, and GDP in July was now seen as having grown by 0.3%, up from a previous estimate of 0.1%.

ONS: Fall in GDP driven by manufacturing

The decline in UK manufacturing last quarter drove the economy down, says ONS director of economic statistics Darren Morgan:

Morgan also points to a ‘notable’ fall in retail activity – a sign that the cost of living crisis hit consumer spending.

“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.”

UK manufacturing output tumbled

UK factories had another rough quarter.

Production output fell by 1.5% in July-September, which is the fifth consecutive quarter of contraction.

This was driven by a 2.3% tumble in manufacturing output of 2.3% – with all 13 sub-sectors of the manufacturing sector shrinking.

Builders did better – construction output rose by 0.6%, a slowdown from the previous quarter, driven by a rise in new orders in the quarter.

Updated

Service sector stalled as state funeral

The UK services sector stalled in the July-September quarter, with no growth.

That’s partly due to the state funeral – services output fell 0.8% in September, following growth of 0.1% in August and 0.5% in July.

UK economy by sector

The ONS says around half of the 0.6% drop in activity in September was due to the bank holiday.

Unlike normal bank holidays, there was not a shift to leisure and tourism activities because of the widespread nature of business closures.

Therefore, while it is very difficult to separate the bank holiday impact from other factors affecting the economy, we estimate that at least half of this month’s fall in GDP is because of this bank holiday.

Updated

UK GDP
The UK economy shrank in the last quarter Photograph: ONS

Economy shrank 0.6% in September

In September alone, the economy shrank by 0.6%.

Growth was affected by the bank holiday for the State Funeral of Queen Elizabeth II, where some businesses closed or operated differently on this day, the Office for National Statistics says.

Updated

UK economy contracted by 0.2% in Q3 - putting it on brink of recession

Newsflash: the UK economy shrank by 0.2% in the last quarter, putting it on the brink of recession.

The Office for National Statistics reports that GDP fell in the July-September quarter, following a 0.2% rise in April-June.

That’s less bad than feared, but still shows the UK economy is weakening as the cost of living crisis and rising interest rates hit the economy.

Updated

The rise in people unable to work due to ill health has also hit the UK economy.

Half a million people have left the workforce in the past three years because they are suffering from long-term illness.

Lockdown-related injuries are a factor – there’s been a big rise in the number of people being unfit for work because of neck and back problems sustained through home working.

And with NHS waiting lists are at record levels, those who need help face a long wait to get treatment.

The worsening health of the British people is holding back economic growth for the first time since the Industrial Revolution after years of underinvestment in services, Andy Haldane warned this week.

The chief executive of the Royal Society of Arts (RSA) said more than a century of progress on health and wellbeing was going into reverse, with a direct impact on the economy and the cost of living emergency.

“We’re in a situation for the first time, probably since the Industrial Revolution, where health and wellbeing are in retreat,” he said.

“Having been an accelerator of wellbeing for the last 200 years, health is now serving as a brake in the rise of growth and wellbeing of our citizens.”

Today’s UK Q3 GDP report is expected to “highlight starkly the foolhardiness” of what is likely to come from the Chancellor of the Exchequer next week, says Michael Hewson of CMC Markets.

As he points out, tax rises and spending cuts could be counter-productive:

Today’s numbers are expected to see a sharp contraction of -0.5%, with the outlook for Q4 unlikely to be much better, and yet next week the UK government is set to cut spending and raise taxes to plug what the OBR says is a fiscal black hole of £40bn or so, depending on varying assumptions about interest rates, inflation and growth.

It’s certainly a worrying number, but I’m not sure the measures next week will do anything to close that gap. If anything, they could make things worse at a time when the economy is slowing sharply.

Today’s GDP report could signal the start of a deep and long recession, fears Deutsche Bank UK economist Sanjay Raja.

He told clients earlier this week that UK GDP probably fell by 0.6% in July-September (Q3).

The drop in Q3 GDP reflects continued weakness in household and business confidence, higher inflation, and higher interest rates in the economy, with household consumption contracting in the quarter, business investment slowing, and government spending falling further.

Raja added that a Q4 recession can no longer be ruled out, with the economic outlook weakening further ahead.

Headwinds to the UK economy will almost inevitably push the economy into recession, with global growth slowing, confidence deteriorating, and persistently high inflation and rising interest rates squeezing disposable incomes further.

Introduction: UK GDP report could show recession looming

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

This morning we learn if the UK economy is heading into recession, when the first estimate of GDP for the last quarter is released at 7am.

Economists predict that the economy contracted in the July-September quarter, with activity falling by around 0.5%, as businesses and households struggle with rising inflation and higher borrowing costs.

The surge in UK energy bills this year has hammered disposable incomes, leaving households with less to spend on other goods and services, and also squeezed businsses.

A technical recession is defined as two quarters of contraction in a row, so this would put the UK on the brink of what would be a painful recession. The Bank of England warned last week that the UK could fall into the longest downturn in a century.

It’s almost inevitable the economy shrank in the third quarter, explains Alvin Tan of RBC Capital Markets:

To avoid Q3 GDP contracting for the third quarter as a whole, September monthly GDP would need to rise by around 1.2% m/m.

That looks highly unlikely given September’s extra bank holiday for Queen Elizabeth’s funeral, and we expect September GDP to fall 1% m/m, which would leave Q3 GDP showing a contraction of 0.7% q/q in our estimate.

Such a fall would cast a dark shadow over Jeremy Hunt’s autumn statement next Thursday, when the chancellor is expected to announce tens of billions of pounds of tough spending cuts and tax rises.

Elsewhere today, financial markets continuing to rally after inflation in the US slowed last month. That news that triggered the best rally on Wall Street in over two years last night, sending the pound jumping to $1.17.

Japan’s Nikkei index has closed at a two-month high, while copper – a bellwether of economic prospects – has jumped 3% this morning to a near five-month high.

The agenda

  • 7am GMT: UK GDP report for the third quarter of 2022

  • 7am GMT: UK trade report for September

  • 7am GMT: Germany’s October inflation report

  • 8.30am GMT: Hong Kong’s Q3 GDP report

  • 1pm GMT: NIESR publishes its monthly UK GDP tracker for October

  • 3pm GMT: University of Michigan’s US consumer sentiment survey for November

Updated

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