This post was originally published on this site
The U.K. economy saw a surprising contraction in August that’s likely to increase worries about a recession, as the country teeters on the edge of a financial crisis.
Gross domestic product fell by 0.3% in August 2022, following growth of 0.1% in July, which was revised down from expansion of 0.2%, the Office for National Statistics reported Wednesday. In the three months to August, GDP also fell by 0.3%.
The statistics agency said monthly GDP is now estimated to be at the same level as its pre-coronavirus levels in February 2020.
The main contributor to the lackluster August number was a 1.8% annual drop in production, which followed a 1.1% drop in July — revised down from a decline of 0.3%. Services slipped by 0.1%, following growth of 0.3% in July — revised down from 0.4% growth. Construction grew 0.4% in August and output in consumer-related services fell by 1.8%.
The data comes on the heels of an International Monetary Fund prediction that the U.K. economy will grow just 0.3% in 2023, a prediction that puts it at the bottom rung of major developed countries. That compares to expectations of 3.7% growth this year.
Pierre-Olivier Gourinchas, the IMF’s economic counselor, was particularly critical of the government’s unfunded tax cuts announced last month that have roiled financial markets.
He urged Prime Minister Liz Truss and Chancellor Kwasi Kwarteng to align their tax-cutting goals with the Bank of England’s inflation-fighting mandate, in reported comments from a press conference in Washington on Tuesday. Gourinchas also said the government’s mini-budget will only worsen inflation, hovering at nearly the highest in 40 years.
“Central banks are trying to tighten monetary policy, and if you have at the same time fiscal authorities that try to stimulate aggregate demand, it’s like having a car with two people in the front … each trying to steer the car in a different direction. That’s not going to work very well,” said Gourinchas.
Investors were braced for more volatility in U.K. government bonds on Wednesday after the Bank of England said it would halt its emergency intervention program announced last month as planned at the end of the week. That’s as the Financial Times reported that the BoE told bankers privately it could extend that support if needed.
Analysts said in light of fresh, lackluster growth data, the writing may be on the wall. “The nation appears to have officially leapt from stagnation to contraction once again, in the latest installment of the monthly GDP roller coaster, with economic activity ebbing and flowing erratically for the last nine months,” said Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, in a note to clients.
“Investors are waiting for signs that the recession has arrived, and while on traditional metrics, the UK isn’t there yet, today’s announcement takes us one heavy step closer to that reality,” she said.
