Britain’s economy shrinks again as recession looms

September was always going to be a tough month for economic growth. The additional bank holiday added for the Queen’s funeral, combined with much displaced activity for the days around it, created a consensus amongst economists that we’d see economic contraction that month. And indeed, we have. New figures published by the Office for National Statistics this morning show the economy shrank by 0.6 per cent in September. This was mainly driven by a fall in services – roughly half of the economy's contraction is attributed to business closures due to the events of that month.

But it’s not September’s figures that are most worrying this morning. The problem facing the UK economy is not a one-off contraction due to a one-off event, but rather the growing indication that we have entered recession. August’s growth figures were revised to reveal a contraction of 0.1 per cent (slightly better than the 0.3 per cent fall that was first estimated), but Q3 figures published this morning show a contraction of 0.2 per cent between July and September this year.

The technical definition of a recession is two consecutive quarters of negative growth, meaning that if Q4 shows an overall contraction as well, the UK economy will meet its criteria. But Britain has been teetering on the brink of formal contraction for some time now. Plenty of people are already feeling worse off in large part due to double-digit inflation reducing their purchasing power.  Figures for Q2 this year were revised upwards from a contraction of 0.1 per cent to growth of 0.2 per cent, fending off the label ‘recession’ for a while longer. Q3 figures will be up for revision too, and it’s notable that the contraction is slightly less bad than expected (the Bank of England was forecasting a 0.5 per cent fall). But regardless of any small adjustment, the economy seems to be heading in one direction – downwards – and is forecast by the BoE to enter the longest recession on record.

Today’s figures are another bit of grim news leading up to next week’s Autumn Statement, in which chancellor Jeremy Hunt is expected to announce a host of tax rises and spending cuts. Fears are growing that dramatic fiscal tightening will make the prospect of a recession worse. But the Treasury feels as if its hands are somewhat tied due to the pressure to prove to markets and investors that the UK has its finances under control. These GDP figures won’t have much influence over those announcements – most decisions will have been taken already – but they are a stark reminder of the precarious circumstances Hunt and the government must navigate.