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The economy is going to get worse before it gets better. That is Jeremy Hunt’s assessment of the current state of the UK and few would argue with the chancellor’s judgment.
If ever there was a case for not making a summer a swallow, then the October growth report from the Office for National Statistics was certainly it.
Certainly, the economy expanded by 0.5% in the month, but that was mainly due to a bounceback in activity from September’s 0.6% decline, when there was an extra bank holiday for the funeral of Queen Elizabeth II.
While bank holidays are good for some sectors of the economy – such as hospitality – overall the closure of offices, factories and building sites reduces gross domestic product.
Retailers had a good time in October and new car sales rose significantly after a particularly weak September. Activity in the health sector has also increased as the autumn vaccine booster drive continues.
A better guide to the underlying state of the economy is provided by quarterly data, which showed GDP down 0.3% in the three months to October compared with the three months ended in July.
This is hardly surprising given the impact of high inflation on household budgets and business spending. Weak consumer spending and investment plans are a direct result of the sharpest annual price increase in four decades.
As Hunt acknowledged in his response to the official data, there is a tough road ahead. After October’s increase in GDP, the economy is now 0.4% larger than in February 2020 when the UK began to feel the effects of the global Covid-19 pandemic.
Although real incomes have fallen and the Bank of England is expected to raise interest rates again later this week, the forecast is for the economy to contract for at least the rest of the winter, and possibly beyond.
On the upside, there is hope that inflation is at its peak – or close to it, which could mean banks can limit increases in borrowing costs.
But the question is not whether the economy will enter a recession but how deep and how long that recession will last. The bank is predicting a longer but shallower recession, but there is clearly a risk of something more painful.
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