The UK economy shrank more than forecast in the third quarter and lagged further behind other advanced economies as households grappled with high inflation.
Data released by the Office for National Statistics on Thursday also suggested that consumers are not tapping into their savings as much as forecast, suggesting the UK recession could be deeper than expected.
UK manufacturing fell 0.3% between the second and third quarters, a bigger contraction than initial forecasts of 0.2%, the data showed.
In the third quarter, the economy was 0.8% smaller than in the last quarter of 2019, before the Covid pandemic.
All other G7 economies, on the contrary, regained the positions lost during the pandemic. In the three months to September, the US economy was 4.3% larger than in the fourth quarter of 2019, while output in the eurozone rose 2.2%.
Gabriela Dickens, UK economist at consultancy Pantheon Macroeconomics, warned that the UK economy would continue to underperform other G7 countries.
“We expect Britain to suffer the deepest recession of the major advanced economies in 2023 due to the weight of headwinds from both monetary and fiscal policy,” she said.
Last month, the OECD, a club of mostly rich nations, also predicted that the UK would be the worst-performing economy in the G20, excluding Russia, over the next two years.
The ONS also revealed that the non-pension savings ratio – the average share of income being saved – rose to 1.8% in the third quarter from 1.3% in the previous quarter. The figures show that people are becoming more cautious in the face of rising economic risks.
The Office for Budget Responsibility, the UK’s fiscal watchdog, predicted last month that the savings ratio would fall to zero in the third quarter as households use their savings to cushion the impact of higher prices.
Consumers continuing to save rather than spend could lead to a deeper recession than the 2.1 per cent drop from peak to trough forecast by the OBR.
Figures from the ONS show that real disposable household income – the amount that can be spent after taking inflation into account – fell by 0.5% between the second and third quarters.
It was the fourth straight decline as wages failed to keep up with inflation. With real income falling or stagnant for most of the past three years, real household income was 2.9% below the third quarter of 2019, the biggest decline over that time period since records have been kept.
After accounting for inflation, household spending fell 1.1 percent in the third quarter, the first decline since the start of last year when the country was in lockdown.
Many economists believe the third-quarter decline marks the start of a prolonged recession. Thomas Pugh, economist at audit, tax and advisory firm RSM UK, said the economy may not be bigger in 2025 than it was in 2019, before the pandemic.
“The result is that the UK is almost certainly now in a year-long recession, which could turn out to be deeper than the one in the early 1990s,” Pugh said.
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