September's fall in UK GDP was probably affected by the extra public holiday. However activity is suffering from underlying weakness. Output also fell in Q3, and while a return to a typical working week will provide a boost to Q4, GDP is likely to fall further in the first half of 2023.
Household incomes are being subject to a severe squeeze from high inflation, while house prices are likely at the beginning of a sustained fall, and the Bank of England is set to raise interest rates further. There is also a likely risk that the Government could deepen the recession by going too far and too fast with its fiscal consolidation programme.
Martin Beck, chief economic advisor to the EY ITEM Club, says: “With an additional bank holiday in September and spending power under pressure from high inflation, a poor performance from GDP was almost a given. In practice, a 0.6% month-on-month fall in output was worse than the consensus prediction of a 0.4% decline.
“However, while September's performance meant the economy shrank 0.2% in Q3, the quarterly outturn was less severe than expected, reflecting upward revisions to output in July and August. But Q3's drop was the first since lockdown afflicted Q1 2021 and left the economy 0.4% smaller than its pre-pandemic size in Q4 2019.
“Moreover, consumer spending fell 0.5% in Q3, compared with a 0.2% rise in the previous quarter, indicating the impact of cost-of-living pressures. Business investment also fell, although there was a big positive contribution to GDP from net trade.
“Q4 should enjoy a normal complement of working days, delivering a mechanical boost to GDP. But with consumers and businesses under pressure from high inflation, rising interest rates and energy bills, and the housing market facing a correction – the EY ITEM Club expects output to continue to fall over the first half of next year. If the Government tightens fiscal policy aggressively in the near-term in the Autumn Statement on November 17, the mild recession that the EY ITEM Club anticipates could become a more serious downturn.”