The UK economy contracted by 0.1% in the third quarter of 2023, according to the Office for National Statistics (ONS), raising the risk of a recession. The decline follows a 0.2% contraction in the second quarter, meaning the economy has now shrunk for two consecutive quarters, the technical definition of a recession.
Services and Production Sectors Drag Down GDP
The ONS reported that the services sector, which accounts for around 80% of the economy, shrank by 0.2% in the third quarter. Production output also fell by 0.3%, while construction grew by 0.1%. The largest contributors to the decline were information and communication, and transport and storage.
“The economy contracted slightly in the latest quarter, with falls across services, production and construction,” said Darren Morgan, director of economic statistics at the ONS. “The wider picture is one of a broadly flat economy over the last year.”
Inflation and Interest Rates Weigh on Growth
The contraction comes as the Bank of England has raised interest rates to 5.25% to combat high inflation, which remains above 6%. Higher borrowing costs have squeezed households and businesses, reducing spending and investment. The Bank has warned that the economy could be flat for the next two years.
Chancellor Jeremy Hunt acknowledged the challenging economic backdrop. “High inflation is the single biggest barrier to growth,” he said. “We are taking action to bring it down, but we need to stick to the plan.”
Recession Fears and Government Response
The consecutive quarterly declines have led some economists to predict a recession, though the official definition requires two consecutive quarters of negative growth. The UK economy has been stagnant since early 2022, with GDP only 1.4% above pre-pandemic levels.
The government has faced criticism for its handling of the economy, with Labour accusing the Conservatives of presiding over a “cycle of stagnation”. Shadow chancellor Rachel Reeves said: “This is a recession made by the Conservatives. After 13 years of economic failure, working people are paying the price.”
The ONS data also showed that the UK economy grew by 0.2% in September alone, but this was not enough to offset the broader quarterly decline. The Bank of England is expected to keep interest rates on hold at its next meeting in December, as it balances the need to control inflation against the risk of deepening the downturn.
