Latest Forecast Sees Contraction in Q3 But No Recession in 2023

Main points

• Monthly GDP grew by 0.2 per cent in August, higher than our previous forecast of 0.1 per cent, following a contraction of 0.6 per cent in July. This monthly figure was driven by increasing output in the services sector, with particularly notable growth in the professional, scientific and technical activities sub-sector (including services such as architectural and engineering activities) as well as the education sub-sector. Besides the base effect resulting from the impact of strikes in July, growth in the education sub-sector may have been enhanced by a methodological choice by the ONS, which treats school attendance as constant, so that summer holidays do not reduce the estimate of education output in months like August. Services growth in August was partially offset by declining output in the production and construction sectors, which saw contractions of 0.7 and 0.5 per cent, respectively.
• GDP grew by 0.3 per cent in the three months to August relative to the previous three-month period. We now forecast GDP to contract by 0.1 per cent in the third quarter of 2023, driven by declining output in all major sectors. Our early forecast for the fourth quarter of 2023 sees GDP growing by 0.2 per cent, entailing our central forecast does not expect a recession in 2023. These forecasts remain broadly consistent with the longer-term trend of low, but stable economic growth in the United Kingdom. It should be noted that this growth profile was not affected by the recent revisions to GDP estimates.

"Today’s ONS figures suggest that monthly GDP grew by 0.2 per cent in August, following a fall of 0.6 per cent in July, driven by increased output in the services sector - particularly in the professional, scientific and technical activities, and education subsectors - which was partially offset by declines in production and construction sector output. GDP increased by 0.3 per cent in the three months to August relative to the previous three month period; however, with higher-frequency indicators for September pointing to declining output in the major sectors as well as muted spending, it is unclear whether we can expect overall growth in the third quarter of this year."

Paula Bejarano Carbo
Associate Economist, NIESR

For a complete forecast of the UK economy, please see our quarterly UK Economic Outlook