The UK is stepping into a recession economy contracts further. Some economists claim it can last the next two years.

In the third quarter of 2022, the U.K. GDP shrank by 0.2%, potentially indicating the beginning of a long recession.

According to the preliminary data, the economy did better than anticipated in the third quarter despite the recession. Refinitiv reported that analysts had predicted a 0.5% decline in economic activity.

Since the 0.1% decline in the second quarter was revised up to a 0.2% rise, the contraction does not yet constitute a technical recession, which is defined as two consecutive quarters of negative growth.

“In output terms, there was a slowing in the quarter for the services, production and construction industries; the services sector slowed to flat output on the quarter driven by a fall in consumer-facing services, while the production sector fell by 1.5% in Quarter 3 2022, including falls in all 13 sub-sectors of the manufacturing sector,” said the Office for National Statistics in its report today.

The Bank of England predicted this week that the current slump, which started in the third quarter, would likely persist well into 2024 and raise unemployment to 6.5% over the following two years, making it the country's longest recession since records have been kept.

Due the nation's historically high cost of living, real earnings are being squeezed by rising energy and tradeable goods costs. In an effort to control double-digit inflation, the central bank has increased interest rates by the most since 1989.

According to the ONS, the third quarter's quarterly GDP was 0.4% lower than the last quarter of 2019's pre-Covid level. In the meanwhile, the statistics for September, during which UK slipped 0.6%, were impacted by the bank holiday for the state funeral of Queen Elizabeth II.

The new fiscal policy agenda, which is anticipated to contain significant tax increases and spending reductions, will be announced by UK Finance Minister Jeremy Hunt next week. To stabilise the nation's economy, Prime Minister Rishi Sunak has cautioned that "tough decisions" will need to be made.

George Lagarias, chief economist at Mazars said, “while some headline inflation numbers may begin to look better from here on, we expect prices to remain elevated for some time, adding more pressures on demand”. He continued with “Should next week’s budget prove indeed ‘difficult’ for taxpayers, as expected, consumption will probably be further suppressed, and the Bank of England should begin to ponder the impact of a demand shock on the economy.”

According to the Dutch bank ING, the UK's GDP will be reduced by 2% overall by the middle of 2023, which would be equal to the recession that devastated the nation in the 1990s.

James Smith, an economist for ING Developed Markets, said the bank was planning on a 0.3% decline in economic activity in the fourth quarter as consumer spending declines, which would firmly establish the technical recession.

“As the winter wears on, we also expect to see more strain emerge in manufacturing and construction – both of these sectors suffered noticeably during the 1990s and 2008 recession,” Smith said. He followed up with, “the fall in manufacturing new orders, linked to falling global consumer demand for goods and rising inventory levels, as well as higher energy costs, point to lower production by early 2023. Likewise, the sharp rise in mortgage rates, and the very early signs of house price declines, point to weaker building activity through next year.”

Smith pointed out that a lot would rely on next week's budgetary pronouncements, but ING anticipates the Bank of England's interest rate hike path to peak at roughly 4%.

(Sources: CNBC.com, bbc.co.uk)