The UK economy is on the brink of recession as it contracts in August

LONDON, Oct 12 (Reuters) – The UK economy looks set to slip into recession as data showed it contracted unexpectedly in August, underscoring the challenge for Prime Minister Liz Truss to deliver on her promises to accelerate growth.

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

A Reuters poll of economists pointed to zero growth.

Output growth in July was revised down to 0.1% from an earlier estimate of 0.2%, and in the three months to August GDP fell by 0.3%, the first drop since early 2021, when the country entered stuck in the coronavirus crisis.

“Continued pressures on household finances continue to weigh on growth and may have pushed the UK economy into a technical recession from the third quarter of this year,” said Yael Selfin, chief economist at KPMG UK.

The economy was now believed to have regained its size just before the pandemic hit, having previously been estimated at 1.1% above, the Office for National Statistics said.

Manufacturing is down 1.6% since July and more maintenance work than usual in the North Sea hit the mining and quarrying sector, which includes oil and gas. It collapsed by 8.2%.

“Many other consumer-facing services have struggled, with retail, hairdressers and hotels all doing relatively poorly,” said ONS chief economist Grant Fitzner.

GDP in September is likely to be weakened by a one-off holiday to mark Queen Elizabeth’s funeral.

Going forward, the UK economy is likely to slow sharply as rising inflation hits households and forces the Bank of England to raise interest rates quickly even as economic activity stagnates.

Samuel Tombs, an economist at Pantheon Macroeconomics, said about a third of households run out of savings to speak of, and the 30% with a mortgage are likely to reduce spending if borrowing costs rise.

“The combination of the continued decline in real incomes from mortgage refinancing, the usual lags between changes in business sentiment and spending decisions, and the constraints macro-policymakers are now facing suggests the recession won’t end until late 2023 at the earliest.” Tombs said.

The International Monetary Fund said on Tuesday it expects Britain’s GDP to grow in 2023, but by just 0.3%.

That was stronger than forecasts that the economies of Germany and Italy will contract next year as they feel the full brunt of cuts in gas supplies from Russia caused by the war with Ukraine.

Truss and Finance Minister Kwasi Kwarteng have promised to accelerate economic growth, but their plan for unfunded tax cuts has roiled financial markets and raised expectations of how quickly the BoE will push up borrowing costs.

The central bank is also trying to curb the rise in market interest rates, which is weighing heavily on pension funds. It has said it will end its emergency bond-buying program on Friday.

However, among the funds’ calls for an extension of the deadline, the Financial Times on Wednesday quoted three sources as saying the BoE had privately signaled to lenders that it was ready to continue the emergency program beyond Friday if market conditions called for it.

Reporting by William James and William Schomberg; Adaptation by John Stonestreet

Our standards: The Thomson Reuters Trust Principles.