UK recession risk rises with unexpected drop in August output

The UK economy shrank unexpectedly in August for the second time in three months, raising the possibility that the country is now in a recession.

The 0.3% drop in output was driven by a sharp decline in manufacturing and a small contraction in services, the Office for National Statistics said Wednesday. Economists had expected no growth in the month.

The decline means the economy will be lucky to avoid a downturn in the third quarter, marking the start of a cost-of-living recession that many analysts anticipate will persist into the early months of 2023 at least.

Chancellor of the Exchequer Kwasi Kwarteng pointed to the Russian President Vladimir Putin’s attack on Ukraine as the biggest factor dragging down the UK economy.

“Countries around the world are facing challenges right now, particularly as a result of high energy prices driven by Putin’s barbaric action in Ukraine,” Kwarteng said in a statement. “This government acted quickly to put in place a comprehensive plan to protect families and businesses from soaring energy bills this winter.”

Escaping with a flat third quarter would require the economy to 1.1% gain in September, an unlikely outcome given the extra public holiday for Queen Elizabeth II’s funeral and the period of mourning prior to it. Most economists estimate that output fell sharply last month.

Of the three main sectors, only construction rose. Services fell 0.1% and production dropped 1.8%, driven by a 1.6% decline in manufacturing.

The biggest in services came from arts, entertainment and recreational activities followed by a slowdown in health. Production dropped because of declines in mining and quarrying as well as lower output from manufacturing, electricity and natural gas. Maintenance at larger terminals led to a sharp drop in oil and gas extraction.

Consumers and businesses face a rough ride in the coming months. While tens of billions of pounds of government support for energy bills will provide a cushion, inflation is set to climb back into double digits and the Bank of England is expected to respond by aggressively raising the cost of borrowing.

Concerns about the stewardship of the economy under Prime Minister Liz Truss has also hammered stocks, bonds and the pound, destroying wealth and making foreign goods and travel more expensive.

© 2022 Bloomberg

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