Chancellor hints at tax hikes as GDP falls pushing UK towards recession
Gross domestic product (GDP) measures the value of goods and services produced in the UK. It estimates the size of, and growth in, the economy.
The Office for National Statistics (ONS) estimates GDP fell 0.2% in Q3 (July to September 2022), which is actually better than the 0.5% contraction expected.
However, on a month-by-month basis, the figure fell 0.6% in September, affected by the bank holiday for the State Funeral of the Queen, as businesses closed or “operated differently”, the ONS said.
It noted a slowing of output in services, production, construction, and manufacturing, as household expenditure fell 0.5% in the quarter.
UK on cusp of recession
While technically the ‘recession’ label can only be applied when an economy shrinks for six months (two consecutive quarters), “given the bleak economic picture from the Bank of England, it’s quite clear this reading marks the start of what we expect to be a significant recession for the UK economy”, according to Joshua Raymond, director at online investment platform XTB.
For Paul Dales, chief UK economist at Capital Economics, the figures “are hardly a good backdrop for the tightening in fiscal policy the Chancellor is expected to announce in the Autumn Statement next Thursday”.
He added that with the effect of inflation, a weakening housing market and softening global demand, it will mean that real GDP continues to fall for about a year, “resulting in a peak-to-trough fall in GDP of around 2%”.
Dales said: “None of this will stop the Chancellor from tightening fiscal policy next Thursday or prevent the Bank of England from raising rates above the current rate of 3%. We still think rates may need to rise to 5%, although a major tightening in fiscal policy may reduce the need for rates to rise quite that far.”
‘Extremely difficult decisions ahead’
In response to the GDP figures, Chancellor of the Exchequer, Jeremy Hunt, said: “I am under no illusion that there is a tough road ahead – one which will require extremely difficult decisions to restore confidence and economic stability.
“But to achieve long-term, sustainable growth, we need to grip inflation, balance the books and get debt falling. There is no other way.”
For Kevin Brown, savings specialist at Scottish Friendly, the latest readings suggest tougher measures which will impact households already squeezed amid the cost-of-living crisis.
He said: “All eyes are now on what the Treasury does next week, and the forecasts that come with the Autumn Statement. It looks increasingly like fresh tax rises will ratchet up tough conditions for households, with frozen thresholds working with inflation to put even more pressure on incomes, while interest rates remain too low to relieve savers.”
This is echoed by Nicholas Hyett, equity analyst at Wealth Club, who said: “With consumers battening down the hatches for a tough winter and the government proposing substantial tax rises and spending cuts, we think the economy will shrink again in Q4 – officially pushing the UK into recession. With the Bank of England predicting recession could stretch well into late 2023 or even beyond, the Queen’s funeral may end up marking the start of an ‘annus horribilis’ for the whole of the UK.”