The UK economy contracted by more than previously estimated in the third quarter and lagged further behind other advanced economies, as households struggled amid high inflation.
UK output fell 0.3 per cent between the second and third quarter, a larger contraction than initial estimates of 0.2 per cent, data published by the Office for National Statistics showed on Thursday.
In the third quarter, the UK economy was 0.8 per cent below the level in the final quarter of 2019, before the pandemic. That was worse than an earlier estimate of a 0.4 per cent gap due to revisions to previous quarters as well.
Other G7 economies, by contrast, have regained the ground lost during the pandemic. In the three months to September, the US economy was 4.3 per cent larger than in the fourth quarter of 2019, while eurozone output was up 2.2 per cent.
Gabriella Dickens, UK economist at the consultancy Pantheon Macroeconomics, warned that the UK economy would continue to underperform other G7 countries.
“We expect Britain to suffer the deepest recession among major advanced economies in 2023, due to the severity of the headwinds from both monetary and fiscal policy,” she said. Last month, the OECD also forecast the UK would be the worst performer in the G20 bar Russia over the next two years.
The ONS revised down the UK economy’s expansion in the third quarter compared with the same period in 2021 to 1.9 per cent, from 2.4 per cent in previous estimates.
“Our revised figures show the economy performed slightly less well over the last year than we previously estimated, with manufacturing and electricity generation notably weaker,” said Darren Morgan, ONS director of economic statistics.
A large part of the UK’s underperformance comes from struggling households. The ONS showed that real households’ disposable income, which is what households have available to spend after taking inflation into account, fell 0.5 per cent between the second and third quarter. It was the fourth consecutive fall as wages had not kept up with inflation.
After accounting for inflation, household spending fell by 1.1 per cent in the third quarter, the first fall since the start of last year when the country was in lockdown.
The household saving ratio, the average share of income that is saved, rose to 9 per cent in the third quarter from 6.7 per cent in the previous three months, pointing to consumers being cautious amid rising economic risks.
While much of the rise reflected a change in pension entitlements related to the rise in gilt yields during autumn, the non-pension saving ratio also ticked up, which represented an “unexpected headwind,” according to Martin Beck, chief economic adviser to the EY ITEM Club.
Many economists believe that the fall in the third quarter marks the start of a prolonged recession. Thomas Pugh, economist at audit, tax and consulting firm RSM UK, said the economy might be no larger in 2025 than it was in 2019, before the pandemic.
“The upshot is that the UK is almost certainly already in a year-long recession that may prove to be deeper than that experienced in the early 1990s,” said Pugh.