UK Economic Outlook Worsens Following Q3 Contraction

Main points

• GDP contracted by 0.2 per cent in the third quarter of 2022, slightly better than our forecast last month of a 0.3 per cent contraction. The contraction over the month was driven by a 0.8 per cent decrease in services output, which saw large falls in computer programming, consultancy and related activities overtake the slight rise in the human health and social work activities provided by Covid booster jabs.
• The S&P Global/CIPS UK Services and Manufacturing PMIs for October recorded headline business activity balances below the neutral 50 for both sectors, pointing to a strong risk that GDP might continue to fall in the fourth quarter of 2022.
• As the economic outlook worsens, business confidence continues to plummet: October PMIs recorded two-and-a-half year lows in business optimism for the year ahead for the services, manufacturing, and construction sectors.
• Aggressive monetary policy, persistent inflation, and anaemic activity in the manufacturing and services sectors in October bode poorly for UK economic performance in the fourth quarter of this year. Despite this negative outlook, we expect the energy price guarantees for households and firms, and growth in the construction sector to contribute to flat GDP growth in Q4.
• For a complete forecast of the UK economy and more detailed account of current economic conditions, please see our Autumn UK Economic Outlook, released today.

"Today’s ONS estimates confirm a production-driven contraction in GDP in the third quarter of this year, with a quarter-on-quarter fall of 0.2 per cent. We are currently expecting GDP to be flat in the fourth quarter of this year. However, given that October PMIs recorded figures below the neutral 50 for both the services and manufacturing sectors, consumer and business confidence is plummeting, and higher-than-expected inflation and interest rates continue to squeeze budgets, the risk of a contraction in GDP in the fourth quarter of this year remains elevated. Whether the Chancellor’s upcoming Autumn Statement will alleviate or aggravate current recessionary risks will become clearer next week."

Paula Bejarano Carbo
Data Analyst, NIESR

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