UK's economy unexpectedly shrank in August

Britain’s economy unexpectedly shrank in August as factories and consumer services firms struggled, putting the UK on track to contract overall in the third quarter, according to official figures.

The Office for National Statistics (ONS) said gross domestic product (GDP) dropped by 0.3% between July and August, down from growth of 0.1% the previous month, which was downwardly revised from the 0.2% previous estimation.

Economists had been expecting zero growth in August. The latest data means the economy is likely to contract overall in the third quarter, with the ONS confirming there would need to be growth of more than 1% in September to avert a quarterly decline.

It comes amid fears that the UK is heading for a recession as the cost-of-living crisis takes its toll on households and businesses.

Chancellor Kwasi Kwarteng insisted the Government’s energy support package and growth plan will “address the challenges that we face”. But the financial market turmoil sparked by his mini-budget has sent mortgage rates soaring, heaping yet more pressure on cash-strapped Britons.

The International Monetary Fund (IMF) warned on Tuesday that the UK economy could sharply reduce in 2023 as consumer spending catches up with rampant inflation and higher interest rates. It downgraded its forecast for UK GDP growth next year to just 0.3% in 2023 from 0.5% previously pencilled in.

The ONS said there has been a continued slowing in three-month on three-month growth, with gross domestic product (GDP) falling by 0.3% in the quarter to August.

Grant Fitzner, Chief Economist of the ONS, said: “The economy shrank in August with both production and services falling back, and with a small downward revision to July’s growth the economy contracted in the last three months as a whole.

“Notable decreases were also seen across much of manufacturing”, he added. The latest ONS data showed manufacturing output dropped 1.6% in August, while the services sector also saw a decline, down 0.1%.

Output in consumer-facing services tumbled by 1.8% in August after growth of 0.7% in July, according to the figures.

The Bank of England has already predicted the economy will fall into recession towards the end of the year and has forecast a contraction of 0.1% in the third quarter.

James Brown, Managing Partner at global consultancy Simon-Kucher & Partners, commented: “Following the disappointing data in July, the 0.3% drop in GDP in August will do little to change the concerns business leaders hold around the UK economy as we head into winter. At a macro level, policy makers are considering ways to reinvigorate growth whilst also mitigating the effects of inflation on the most vulnerable consumers and at-risk business sectors.

“For individual UK businesses already facing substantial margin erosion from dramatic cost rises and supply chain concerns, decisions around where and how to push through the price increases required to keep their businesses sustainable are front of mind. At the same time, demand is shifting as consumers rethink their spending on non-essential and higher-priced items.

“Very few management teams have the experience of working in an environment where this magnitude of increase is needed and a significant number of businesses have delayed raising prices in an attempt to avoid volume losses. It’s likely more price increases will follow at a time when the overall economic environment is becoming even more challenging.”