UK GDP Unexpectedly Shrinks In August

(RTTNews) - The UK economic output contracted unexpectedly in August on decelerating manufacturing and services activity, signaling that the economy is sliding into a recession.

Gross domestic product shrank 0.3 percent month-on-month, in contrast to the revised 0.1 percent growth in July, the Office for National Statistics reported Wednesday. GDP was forecast to stall after July's initially estimated growth of 0.2 percent.

Monthly GDP is now estimated to be at the same level as its pre-coronavirus levels, the ONS said.

On a yearly basis, GDP expanded at a slower pace of 2.0 percent after a revised 3.1 percent growth in July. This was also slower than economists' forecast of 2.4 percent.

In the three months to August, GDP fell 0.3 percent compared with the three months to May.

Chancellor Kwasi Kwarteng said countries around the world are facing challenges right now, particularly as a result of high energy prices driven by Russian President Vladimir Putin's barbaric action in Ukraine.

However, the government's growth plan will address the challenges, said Kwarteng.

At the September meeting, the Bank of England had forecast the economy to shrink 0.1 percent in the third quarter.

The central bank had initiated temporary gilt purchases after the Chancellor's mini budget announcement on September 23 that included tax cuts for the rich, which created chaos in the financial markets and dragged the pound to record lows against the US dollar.

The chancellor had also announced an energy support package.

The Bank of England had to intervene in the bond market and buy government debt following the turmoil.

Wednesday's confirmation by the BoE that it will end its gilt purchases on October 14 as initially announced led to a sell-off in government bonds, pushing borrowing costs higher. Investors widely expected the BoE to extend the deadline of bond purchases.

Capital Economics' Paul Dales said the contraction in real GDP in August won't ease the jitters in the financial markets at a time when the recent behaviour of politicians and the words of the Governor of the Bank of England are making the markets nervous.

Dales observed that the duel drag from high inflation and rising interest rates means the economy will fall into a recession involving a peak-to-trough contraction in GDP of 2 percent.

The 0.3 percent fall in GDP is a warning sign that the economy was already stalling before the market turmoil of recent weeks, David Bharier, head of research at the British Chambers of Commerce, said. However, the National Institute of Economic and Social Research observed that the fiscal measures announced in the mini budget will likely cut the recession short and the economy will see positive growth in the fourth quarter of this year.

The International Monetary Fund, which in a rare move had criticized the tax cut and the debt-derived fiscal support measures presented in the mini-budget, lowered the UK growth projection for next year to 0.3 percent in its latest World Economic Report, released Tuesday.

ONS data showed that industrial production was the main contributor to the fall in the monthly GDP. Industrial output plunged 1.8 percent, following a 1.1 percent drop in July. Industrial output was expected to ease 0.2 percent.

Within production, manufacturing output was down 1.6 percent on the month, driven by a 3.0 percent decrease in the manufacture of transport equipment. Mining and quarrying output slid 8.2 percent.

Services output slid 0.1 percent on month in August, reversing July's 0.3 percent rise. Human health and social work activities fell 1.3 percent and became the largest negative contributor to the services fall.

Meanwhile, the construction output grew 0.4 percent after growth of 0.1 percent in July.

In a separate release, the ONS said the visible trade deficit widened to GBP 19.26 billion in August from GBP 17.59 billion in July due to a sharp slowdown in exports growth amid surging imports.

Exports growth eased sharply to 3.9 percent from 11.9 percent. On the other hand, growth in imports advanced to 5.7 percent from 0.1 percent.

The overall trade shortfall was GBP 7.08 billion versus a GBP 5.44 billion deficit in the previous month.