UK Economy Shrank Faster Than First Thought As Real Household Incomes Fall – Business Live

Introduction: UK economy shrank faster than thought in Q3Good morning, and welcome to our rolling coverage of business, the financial markets, and the world economy.

The UK economy shrank faster than first thought over the summer, new data shows, as the country teetered on the brink of recession.

UK GDP shrank by 0.3% in the the third quarter of 2022 (July to September), down from a first estimate of a 0.2% contraction, the Office for National Statistics reports.

Disappointingly, the ONS estimates that UK GDP was still 0.8% below its pre-coronavirus (COVID-19) pandemic level, revised from the previous estimate of being 0.4% below. That means the UK is still lagging behind other G7 countries.

UK GDP to Q3 2022 Photograph: ONSDuring the third quarter of the year, output across the production sector tumbled by 2.3% – including falls in all 13 manufacturing sub-sectors.

The services sector (the latest segment of the economy) grew by 0.1% while the construction sector shrank by 0.2% (rather than growing as previously thought).

Real household expenditure fell by a revised 1.1% in Quarter 3 2022, which was driven by declines in net tourism, transport, household goods and services, and food and drink.

GDP fell 0.3% in Quarter 3 (July to Sept 2022), revised down from a 0.2% fall, with:

▪️ services at 0.1% (revised up from 0.0%)

▪️ manufacturing at -2.8% (revised down from -2.3%)

▪️ construction at -0.2% (revised down from 0.6%)

➡️ t.co/ALn0Sl72UV

— Office for National Statistics (ONS) (@ONS) December 22, 2022 ONS director of economic statistics Darren Morgan says today’s data shows the economy performed “slightly less well” than previously thought:

The bank holiday for the State Funeral of Queen Elizabeth II in September also hit growth in Q3 – leading to a bounceback in October.

Many economists predict the UK will shrink in the fourth quarter of 2022, which would be a technical recession, and struggle in 2023 too.

John Leiper, chief investment officer at Titan Asset Management says today’s ‘dour’ figures set the scene for the looming 2023 recession:

UK GDP declined meaningfully in the third quarter, down -0.3%. That’s worse than expected and brings the annual number to just 1.9% from 2.4% prior. That is the lowest reading since June 2021 following a sharp rebound in activity coming out of the Covid slump. It is concerning, albeit not too surprising, to see household consumption and total business investment declined meaningfully as the economic environment continues to sour.

This sets the scene for a dour 2023 and is consistent with our expectations for a recession next year.

The agenda 9.30am GMT: UK report into “Rising food prices and the impact on consumers”

1.30pm GMT: US weekly jobless figures

1.30pm GMT: US Q3 GDP report (final estimate)

Key events

Investec: Risk of an earlier UK recession are now greaterInvestec economist Ellie Henderson has analysed today’s revised UK GDP data, and concludes that risks of a recession have risen.

She explains:

Quarterly national accounts data released for Q3 this morning confirmed that the economy did indeed contract in the third quarter of the year, as was suggested by the first estimate of the data. Indeed, GDP contracted by 0.3%, a slightly larger fall than the -0.2% reported in the initial release.

There were also downward revisions to the back data, with every quarterly growth number back to Q3 2021 revised down by 0.1%pt. The question now is whether the economy manages to eke out growth in Q4 and avoid a recession at the end of the year. If it does escape the recession label, which still looks possible but harder owing to revisions, this would purely be in the technical sense, with weaker momentum in the UK economy still abundantly clear.

2023 looks likely to bring more difficulties, Henderson adds, with recessions likely in multiple major economies, including the UK.

But when combined with an expected decline in inflation, we believe the door will be open to cut rates in the UK towards the back end of 2023 to support the economy, helping economic momentum rebound in 2024.

Reuters’ Andy Bruce has summed up the key points from today’s UK GDP quarterly national accounts report.

💥 UK economy contracted by more than thought in Q3, by 0.3% qq (pvs estimate -0.2%)

• UK ranks bottom of G7 growth table in Q3 @ONS

• Some Queen’s funeral effect in figures

• Bad news on business investment – revised sharply lower.t.co/yG7GeKESy5

— Andy Bruce (@BruceReuters) December 22, 2022 • Some Queen’s funeral effect

• Q3 GDP now estimated 0.8% below Q4 2019 level, vs 0.4% below previously

• All 13 subsectors of manufacturing contract, construction too. Services sector ekes out sliver of growth.

— Andy Bruce (@BruceReuters) December 22, 2022 Strike-Hit London city pubs see sales at half pre-Covid levelsThe Mad Hatter pub and hotel, operated by Fuller’s, in London. Photograph: Daniel Leal/AFP/Getty ImagesThe wave of strikes across the UK in recent weeks could also hit economic growth this quarter.

Pubs and restaurants in the City of London have reported that sales were cut to almost half pre-pandemic levels during last week’s rail strikes, according to Bloomberg.

They say:

Kate Nicholls, chief executive officer of trade group UKHospitality, said takings were 46% lower in real terms than during the same week in 2019. Four days of strikes caused chaos on train services and convinced many people to work from home.

Across London as a whole, revenue was down 37% last week compared with 2019 and adjusting for inflation, Nicholls said. Hospitality businesses across the UK reported a 30% cancellation rate on bookings, as Christmas parties were called off.

Peter Marks, the chairman of nightclub operator Rekom UK, said sales were down 20% last week. The final weekend before Christmas, traditionally among the busiest, was “substantially down” due to the rail strike on Saturday.

More here.

Pubs and restaurants in the City said sales fell to almost half pre-pandemic levels during last week’s rail strikes. @UKHospKate said takings in the City were 46% lower in real terms than in 2019.

Across London, sales were down 37%, in real terms. t.co/31DEeOxN8G

— Sabah Meddings (@sabahmeddings) December 22, 2022 Three-quarters of UK firms say Brexit deal has not boosted business

Heather Stewart

More than three-quarters of firms say the government’s post-Brexit trade deal with the EU has not helped them to expand their business in the last two years despite promises that it was an “oven-ready” deal.

A survey by the British Chambers of Commerce (BCC) has prompted the business lobby group to present the government with five urgent recommendations for enhancing the agreement, which has left many exporters struggling to sell into the EU under the current terms.

More than half (56%) of the BCC members surveyed who trade with the EU said they had experienced problems complying with new rules for exporting goods, while 45% reported issues trading in services. Overall, as many as 77% of firms trading under the deal said it had not helped them to increase sales or expand.

The BCC’s director general, Shevaun Haviland, said:

“Businesses feel they are banging their heads against a brick wall as nothing has been done to help them, almost two years after the TCA [trade and cooperation agreement] was first agreed.

The longer the current problems go unchecked, the more EU traders go elsewhere, and the more damage is done.”

UK had worst growth across G7 in Q3The UK has fallen to the bottom in the Group of Seven nations in terms of quarterly economic growth.

The 0.3% contraction in UK GDP in Q3 reported this morning is worse than Japan’s 0.2% fall in GDP, while Canada and the US both expanded pacily, by around 0.7%.

France (+0.2%), Germany (+0.4%) and Italy (+0.5%) all grew in July-September too.

Photograph: ONSLabour’s shadow chancellor, Rachel Reeves, tweets:

NEW: GDP data has been revised down, leaving the UK with the worst growth in the G7 in the last quarter.

The Tories have lost control of the economy and are leaving millions of working people paying the price.

Only Labour has a proper plan to get our economy growing.

— Rachel Reeves (@RachelReevesMP) December 22, 2022 UK economic picture has turned gloomierThis morning’s UK Q3’s national accounts paint a gloomier economic picture, says EY ITEM Club.

Here’s their take:

The national accounts for Q3 showed a slightly bigger 0.3% quarter-on-quarter fall in GDP than initially estimated. The economy’s performance in Q3 wasn’t helped by another fall in household incomes and an unexpected rise in the household saving ratio. GDP growth was also revised lower in each quarter back to Q3 2021.

Scope for a fall in the saving ratio, alongside households’ sizeable cash holdings, will likely offer some support to activity in the near-term. However, the scale of headwinds facing the economy means the EY ITEM Club expects another fall in GDP in Q4, and for recession to persist through the first half of 2023.

The 0.3% quarter-on-quarter fall in GDP in Q3 will probably now mark the start of a recession that will see GDP shrink by 2.5% and last until Q3 2023, predicts Thomas Pugh, economist at audit, tax and consulting firm RSM UK.

He warns that weak

Admittedly, there are signs that the economy bounced back a little in Q4. GDP rose by 0.6% m/m in October and the RSM UK MMBI and the S&P Global Composite PMI both rebounded in Q4.

But the economy almost certainly worsened again in November and December as colder weather and higher inflation continued to bite.

Pugh predicts that the economy will shrink by 0.2% in Q4.

He also explains that the surge in interest rate rises hit business investment (which fell by 2.5% q/q).

Much of the domestic weakness was offset by a surge in exports of 8.9% q/q, but given the global economy is likely to fall into a recession next year, exports can’t be relied upon for much longer.

GDP data ‘confirms expectations’ UK heading into recessionToday’s GDP report confirms expectations that the UK economy is heading towards a recession, says Victoria Scholar, head of investment at interactive investor:

“UK final Q3 GDP fell to -0.3% versus the preliminary estimate of -0.2% and expectations for -0.2%, negatively impacted by the additional bank holiday day for Queen Elizabeth’s funeral. The services sector grew by 0.1% but the production sector shrank by 2.5% with real GDP now 0.8% below its pre-pandemic levels, revised down from a previous estimate of 0.4%. Real household disposable income suffered the fourth consecutive quarter of negative growth falling 0.5% in Q3. However the household saving ratio increased to 9% versus 6.7% in the previous quarter.

The data confirms expectations that the UK economy is heading towards a recession given the downward revision to the latest quarterly GDP figure. While the service sector output was revised slightly higher, construction swung into negative territory and manufacturing was revised lower. All three sectors have been trending lower underscoring the widespread impact from the broad-based macroeconomic headwinds.

Households’ savings jumped during the quarter as a result of soaring gilt yields after the mini-budget turmoil which had an impact on pension entitlements. Consumer spending was the weakest since Q1 2021 when we were locked down during covid because of softer expenditure abroad by UK residents. The pressures from inflation, in particular rising energy bills and rent which added to cost-of-living pressures meaning less money was available for other expenditure during the quarter.

Here’s Suren Thiru, economics director at ICAEW:

NEW: Updated @ONS data reveals slightly deeper Q3 downturn – UK GDP fell 0.3% (from previous estimate of -0.2%).

2021 GDP growth revised up to 7.6% (from 7.5%).

But downward revisions across 2022 means that GDP now 0.8% below pre-covid levels, double previous estimate of 0.4%. pic.twitter.com/Chz7yy7RT0

— Suren Thiru (@Suren_Thiru) December 22, 2022 Weaker Q/Q GDP outturn reflects downward revisions to production & construction output:

▶️Production output fell 2.5% in Q3, from previous estimate of -1.5%

▶️Construction activity fell 0.2%, having previously been estimated to have increased by 0.6%.

— Suren Thiru (@Suren_Thiru) December 22, 2022 Business investment contracts as economy weakenedAnother worrying sign in today’s GDP report -– UK business invesment contracted by 2.5% in the third quarter of the year.

It means that business investment (on, say, new machinery or expanding a factory) is over 8% below its levels before the Covid-19 pandemic began.

The ONS says.

Gross fixed capital formation (GFCF) increased by 1.1% in Quarter 3 2022, revised down from a first estimate increase of 2.5%. The latest quarterly rise was mainly driven by a boost in government investment of 17.3%, although business investment is now estimated to have fallen by 2.5% in Quarter 3 2022.

Business investment saw notable revisions to estimates across quarters because of updated survey data.

Business investment remains 8.1% below its pre-coronavirus pandemic level.

UK business investment Photograph: ONSReal household incomes contracted againReal households’ disposable income fell by 0.5% during the third quarter of this year, as the cost of living crisis hit people, today’s GDP report shows.

That’s the fourth consecutive quarter of negative growth in RHDI, the ONS says.

Although incomes did rise, they did not keep pace with rising prices (‘real’ incomes are adjusted for inflation).

Rising housing costs (such as gas and electricity), transport, miscellaneous goods and services, and food and non-alcoholic beverages all pushed up inflation during the quarter.

The ONS explains:

Within RHDI, nominal gross disposable income rose 1.8%. With the adjustment for the change in pension entitlements not affecting the calculation of disposable income, growth in social benefits other than social transfers in kind, and wages and salaries drove nominal income growth this quarter.

However, the household expenditure implied deflator grew by 2.4%, therefore outpacing nominal income growth. This is weaker inflation growth than seen in the previous quarter as price growth on spending at restaurants and cafes as well as on UK tourist expenditure overseas eased slightly.