UK warned recession now ‘hard to avoid’ as growth drops by 0.3%

UK 'got high on cheap money' says Matthew Lesh

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Matthew Lesh, from the Institute of Economic Affairs, has warned that a recession will be “hard to avoid” now that gross domestic product, effectively a measurement of the total value of goods and services in the UK, has dropped by 0.3 percent. Speaking to Julia Hartley-Brewer on TalkTV, Mr Lesh said the UK had been getting “high on cheap money” for too long, referring to the almost £2.4trillion in debt the UK finds itself in, equivalent to roughly 96 percent of GDP. He said the question now rests with the Government and Liz Truss to nonetheless find policies that will “deliver growth in the medium term”. 

Mr Lesh said: “I think we should be worried. We have seen the GDP figures fall and then they rise back up but the truth is, whether we like it or not, it will probably be hard to avoid an overall recession over the coming months. 

“We are in a very difficult macro situation with high global energy prices, very big inflation, interest rates, whatever happens, whatever the government does, is on its way up. 

“Now, that is the definitional recipe, unfortunately, for some kind of recession. Basically, we got high in cheap money and for a long time, we will be feeling the consequences.” 

Mr Lesh added: “The question now is what are the policies that are going to deliver growth in the medium term and what is the plan from the Government.” 

Weakness in manufacturing and maintenance work in North Sea oil and gas fields contributed to a 0.3 percent fall in gross domestic product from July. The report also showed how a jump in inflation was hitting consumers.

July’s increase in output was revised down to 0.1 percent from a previous estimate of 0.2 percent, and in the three months to August GDP fell 0.3 percent, its first decline since early 2021 when the country was mired in the coronavirus crisis.

“The ongoing squeeze on household finances continues to weigh on growth, and likely to have caused the UK economy to enter a technical recession from the third quarter of this year,” Yael Selfin, chief economist at KPMG UK, said.

The economy was now believed to be back at its size just before the pandemic, having previously been estimated at 1.1 percent above that, the Office for National Statistics said.

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Manufacturing fell by 1.6 percent from July and more maintenance than unusual in the North Sea hit the mining and quarrying sector which includes oil and gas. It slumped by 8.2 percent.

“Many other consumer-facing services struggled, with retail, hairdressers and hotels all faring relatively poorly,” ONS Chief Economist Grant Fitzner said.

GDP in September is likely to be weakened by a one-off public holiday to mark the funeral of Queen Elizabeth.

Further ahead, Britain’s economy looks set to slow sharply as surging inflation hits households and forces the Bank of England to raise interest rates quickly, even as activity stagnates.

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Samuel Tombs, an economist with Pantheon Macroeconomics, said around one-third of households no longer had meaningful savings and the 30 percent with a mortgage were likely to reduce expenditure as borrowing costs went up.

He said: “The constraints macro policymakers now face suggest that the recession won’t end until late 2023 at the earliest.” 

The International Monetary Fund said on Tuesday it expected British GDP to grow in 2023 but only by 0.3 percent.

Ms Truss and finance minister Kwasi Kwarteng have promised to speed up economic growth but their plan for unfunded tax cuts sent financial markets into turmoil and has raised expectations for how quickly the BoE will push up borrowing costs. The central bank is also trying to slow the surge in market interest rates which has put pension funds under severe strain.

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