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UK economy unexpectedly shrinks in August sparking recession fears Recession risk rises as economy unexpectedly shrinks
(36 minutes later)
The UK economy unexpectedly shrank in August for the first time in two months, according to official data.The UK economy unexpectedly shrank in August for the first time in two months, according to official data.
The surprise 0.3% drop came after the economy grew 0.1% in July, according to the Office for National Statistics, sparking recession fears. The surprise 0.3% drop strengthens the Bank of England's prediction that the UK will fall into recession this year.
Analysts had expected economic growth to stall as businesses and households face soaring costs. Analysts thought the economy would stall in August but not shrink as firms and households face soaring costs.
The Bank of England has warned the UK will fall into recession towards the end of the year. Prices are rising at their fastest rate for 40 years, eating into household and businesses' budgets, and outpacing growth in pay.
In normal times, a country's economy grows and on average, people become slightly richer as the value of the goods and services it produces - its Gross Domestic Product (GDP) - increases.In normal times, a country's economy grows and on average, people become slightly richer as the value of the goods and services it produces - its Gross Domestic Product (GDP) - increases.
But sometimes their value falls, and a recession is usually defined as when this happens for two three-month periods - or quarters - in a row, and it marks a sign the economy is performing badly.But sometimes their value falls, and a recession is usually defined as when this happens for two three-month periods - or quarters - in a row, and it marks a sign the economy is performing badly.
The ONS said there has been a continued slowing in three-month on three-month growth figures, with the economy falling by 0.3% in the quarter to August. The latest data from the Office for National Statistics (ONS) means that in the three months to August, GDP also fell by 0.3%.
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The drop in the monthly figure for August was driven by a sharp decline in manufacturing and maintenance work, which slowed down the oil and gas sector, the ONS said.The drop in the monthly figure for August was driven by a sharp decline in manufacturing and maintenance work, which slowed down the oil and gas sector, the ONS said.
ONS Chief Economist Grant Fitzner said that lots of other customer-facing businesses like retail, hairdressers and hotels were also "faring relatively poorly". It marked a fall from July, when the UK economy grew by 0.1%.
But ONS Chief Economist Grant Fitzner said that lots of other customer-facing businesses like retail, hairdressers and hotels were "faring relatively poorly" in August.
"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," Mr Fitzner 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," Mr Fitzner said.
He added that sports events didn't generate as much economic value, after the economy had previously been helped by the UK hosting the Women's Euro Championship in July.He added that sports events didn't generate as much economic value, after the economy had previously been helped by the UK hosting the Women's Euro Championship in July.
A reduction in the amount spending by the government related to the pandemic was also one of the big causes of the slump in manufacturing, which was hit by pharmaceutical companies cutting back production.
The ONS added that some falls were off-set, however, by some professional services like accounting and architecture.
Some experts expect that September could see an even bigger drop in economic output, with the extra bank holiday for the Queen's funeral and the period mourning affecting business opening hours, as well as higher costs starting to bite.
Yael Selfin, Chief Economist at KPMG, said that the UK was now "teetering on the edge of recession".
"The ongoing squeeze on household finances continue to weigh on growth, and likely to have caused the UK economy to enter a technical recession".
"August's drop in GDP likely marks the start of a downward trend that will continue deep into next year," said Samuel Tombs Chief UK Economist at Pantheon Macroeconomics.
Challenges to face
Meanwhile, Suren Thiru, Economics Director for ICAEW (Institute of Chartered Accountants in England and Wales) criticised Chancellor Kwasi Kwarteng's recent mini-budget for sparking market turmoil and potentially piling extra pressure on firms and families as mortgage rates have been sent soaring.
Mr Thiru said: "The government has needlessly risked a longer recession with any boost from the energy package likely to be dwarfed by a sustained squeeze on UK output from persistently high inflation, punishing interest rate rises and acute financial market turbulence."
Chancellor Kwasi Kwarteng insisted the government's energy support package and growth plan will "address the challenges that we face".
He added said: "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."
Speaking to Sky News, Business Secretary Jacob Rees-Mogg also urged caution in interpreting the most recent ONS monthly figures for August.
"The previous quarters figure showed a contraction, was then revised to show economic growth. So, be very careful about how you interpret figures immediately after they're released," he said.
"It's a small amount of a very large economy, but these figures are notorious for being revised afterwards."
But it comes after the International Monetary Fund (IMF) warned that the worst was still to come for the global economy, while 2023 would "feel like a recession" for many people because of rising costs and the continued fall-out of Russia' invasion of Ukraine.
The financial institution warned on Tuesday that the UK economy could sharply reduce in 2023 as consumer spending is dented by rising prices and higher interest rates.
It downgraded its forecast for UK economic growth next year to just 0.3% in 2023 - down from 0.5% previously pencilled in.