Investment in United Kingdom

United Kingdom - Investment

Economy records sharpest contraction since Q1 2021 in the third quarter

GDP contracted 0.2% on a seasonally adjusted quarter-on-quarter basis in Q3 (Q2: +0.2% s.a. qoq). Q3's reading marked the worst result since Q1 2021. As a result, the economy is now below its pre-pandemic level of output. That said, in September activity was hampered by business closures due to an additional bank holiday for the Queen’s funeral ceremony; this artificially dragged down the Q3 reading slightly.

Private consumption contracted 0.5% in Q3, marking the worst result since Q1 2021 (Q2: +0.2% s.a. qoq) and hampered by declining real wages. Public consumption bounced back, growing 1.3% in Q3 (Q2: -1.5% s.a. qoq). Meanwhile, fixed investment rebounded, growing 2.5% in Q3, contrasting the 1.4% contraction logged in the prior quarter. However, this rebound was solely driven by a large expansion in government investment; private investment declined amid uncertainty and tighter financial conditions.

Exports of goods and services growth sped up to 8.0% seasonally adjusted quarter on quarter in the third quarter (Q2: +3.6% s.a. qoq). Conversely, imports of goods and services declined at a sharper pace of 3.2% in Q3 (Q2: -1.5% s.a. qoq).

On an annual basis, economic growth moderated to 2.4% in Q3, following the previous quarter's 4.4% increase.

The economy is expected to continue contracting in quarter-on-quarter terms over the next several quarters due to tighter monetary policy and a more restrictive fiscal stance.

On the Q3 reading and the outlook, analysts at Berenberg said:

“A surge in highly volatile components such as government spending (1.3% qoq) and exports (8.0% qoq) offset the drop in domestic consumption. When the volatility for such components unwinds in coming quarters, combined with a further weakening of household consumption, it will be obvious that a sharp but short recession had already begun in Q3. The data show that the UK appears to be the first among major advanced economies to have fallen into recession.”

FocusEconomics panelists expect the economy to contract 0.3% in 2023, which is down 0.3 percentage points from last month’s forecast. In 2024, GDP will grow 1.3%.