The UK economy contracted more than expected in the third quarter | Daily News Byte

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The UK economy shrank more than previously estimated in the third quarter and lagged behind other advanced economies, as households struggled with higher inflation.

Data published by the Office for National Statistics on Thursday also suggested that consumers are not dipping into their savings as predicted, suggesting that the UK’s recession may be deeper than expected.

UK output fell 0.3 percent between the second and third quarters, a bigger contraction than the initial estimate of 0.2 percent, the data showed.

In the third quarter, the economy was 0.8 percent smaller than in the final quarter of 2019, before the Covid pandemic.

All other G7 economies, by contrast, have regained ground lost during the pandemic. In the three months to September, the US economy was 4.3 percent larger than in the fourth quarter of 2019, while eurozone output rose 2.2 percent.

Line chart of real GDP, Q4 2019=100 shows UK economy underperforms

UK economist Gabriella Dickens of consultancy Pantheon Macroeconomics warned that the UK economy would continue to underperform other G7 countries.

“We expect Britain to suffer the deepest recession of the major advanced economies in 2023, due to the magnitude of headwinds from both monetary and fiscal policy,” she said.

Last month, the OECD, a club of mostly rich nations, also predicted the UK would be the worst-performing economy in the G20 bar Russia over the next two years.

The ONS also revealed that the non-pension saving ratio – the average share of income saved – rose to 1.8 per cent in the third quarter from 1.3 per cent previously. Statistics show that people are becoming more cautious in view of rising economic risks.

The Office for Budget Responsibility, the UK fiscal watchdog, predicted last month that the saving ratio would fall to zero in the third quarter as households tapped into their savings to cushion the impact of higher prices.

Consumers continuing to save rather than spend could lead to a deeper recession, compared to the 2.1 per cent peak-to-trough decline predicted by the OBR.

ONS data showed that households’ real disposable income – the amount available to spend after taking inflation into account – fell by 0.5 per cent between the second and third quarters.

It was the fourth straight decline as wages failed to keep up with inflation. Real household income was 2.9 percent lower in the third quarter of 2019 than in the third quarter of 2019, with real income either falling or stagnating over the past three years — the biggest drop in that period since records began.

A column chart showing the real disposable income of UK households showing the % change in the same quarter over the previous 3 years suffered the biggest 3-year decline on record.

After accounting for inflation, household spending fell 1.1 percent in the third quarter, the first drop since the start of last year when the country was in lockdown.

Many economists believe that the decline in the third quarter signals the beginning of a longer recession. Thomas Pugh, an economist at audit, tax and consulting firm RSM UK, said the economy in 2025 may not be as large as it was in 2019 before the pandemic.

“The implication is that the UK is almost certainly in a year-long recession that could prove deeper than the recession experienced in the early 1990s,” Pugh said.

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