GDP fell by 0.3 per cent in August
(Picture: PA Wire)Fears of a recession grew on Wednesday after the UK economy unexpectedly shrank in August adding to market uncertainty over the Government’s tax-cutting growth plan.
GDP fell by 0.3 per cent in August, according to the Office for National Statistics, as oil and gas production dropped along with a decline in output from manufacturing, sport and health services. At the same time July’s growth figure of 0.2 per cent was downgraded to 0.1 per cent.
Economists predict a decline in GDP when figures for September are released next month. If the final quarter of the year falls into negative territory, Britain would then officially be in recession — defined as two consecutive quarters of negative growth.
The latest gloomy data came amid market jitters over the state of the economy and Kwasi Kwarteng’s failure to set out how the Treasury will pay for his plans to cut taxes by £43 billion.
Although the Chancellor has brought forward a fiscal statement on his growth programme to Halloween, there are fears that the uncertainty over the public finances could lead to a sharp fall in the price of Government bonds and the pound. The Bank of England was forced yesterday to intervene again in the bond market to avert a pension funds crisis, this time extending its £65 billion bond-buying programme to so-called index-linked gilts — government IOUs linked to inflation.
Speaking in Washington last night, Bank of England Governor Andrew Bailey insisted the scheme would come to an end as planned on Friday, causing the value of the pound to fall to below $1.10.
It recovered slightly in early trading this morning amid reports that the central bank could in fact be looking to extend the scheme.
But in a statement today, the Bank tried to squash doubts over the deadline. “As the Bank has made clear from the outset, its temporary and targeted purchases of gilts will end on 14 October,” a spokesman said. “The Governor confirmed this position yesterday.”
Economists said today’s GDP figures showed the UK was now almost certainly heading for recession. Thomas Pugh, at consulting firm RSM UK, said: “The drop in GDP in August shows that the economy is already in recession. GDP will inevitably take another dip in September due to the extra bank holiday for the Queen’s funeral.
“We expect the current recession to last until the third quarter of 2023 as the cost-of-living crisis morphs into a cost-of-borrowing crisis. Whether the recession continues into 2024 will largely depend on how severely the Government embraces any austerity measures.”
The Bank has predicted a 15-month recession, starting later this year, as inflation and rising interest rates stifle growth. Yesterday, the International Monetary Fund downgraded the UK economic outlook, forecasting a 0.3 per cent expansion next year, down from 3.6 per cent this year. The Chancellor insisted the slowdown was partly caused by Russia’s invasion of Ukraine and defended his plan.
Business Secretary Jacob Rees-Mogg played down the figures suggesting they could be “revised afterwards”.
“The previous quarter’s figure showed a contraction, was then revised to show growth,” he told Sky News. “So, be very careful about how you interpret figures immediately after they’re released.”
Having U-turned on plans to abolish the 45 per cent top tax-rate for people earning over £150,000, Mr Kwarteng, below, and Prime Minister Liz Truss are under pressure to explain how they will pay for the rest of their tax-cutting programme. The Institute for Fiscal Studies estimates the plan could require a fiscal tightening of £60 billion by 2026-27.
Following her second Prime Minister’s Questions in the Commons at lunchtime, Ms Truss was expected to meet with Tory MPs from the 1922 Committee to try to restore unity.
But Mr Bailey and the Bank are also coming under pressure to extend its bond buying programme to shore up pension funds.
Nigel Peaple, director of policy at the Pensions and Lifetime Savings Association, told BBC Radio 4’s Today: “We don’t think it makes sense for the Bank to withdraw its gilt purchasing facility on Friday… It would make more sense to carry it on at least until the Government’s next fiscal event at the end of October.”
The origin of these problems, he added, seemed to have been Mr Kwarteng’s mini-Budget and the market reaction to it.
