UK economy stagnates in third quarter

Latest GDP figures show slight rise in September but no growth in July-September period

The UK economy showed no growth in the third quarter, according to the ONS, fuelling fears of stagflation next year. EPA

The UK economy showed no growth between July and September, latest official figures showed on Friday.

On a monthly basis, real gross domestic product is estimated to have grown by 0.2 per cent in September, following a rise of 0.1 per cent in August, which was revised down from an earlier estimate of 0.2 per cent, the Office for National Statistics (ONS) said.

The services sector grew by 0.2 per cent in September and was the largest upward contributor to the overall monthly figure, but output in consumer-facing services, mostly retail, fell by 0.2 per cent in the month, following a 0.7 per cent fall in August.

“The economy is estimated to have shown no growth in the third quarter,” ONS director of economic statistics Darren Morgan said.

“Services dropped a little with falls in health, management consultancy and commercial property rentals.

“These were partially offset by growth in engineering, car sales and machinery leasing.”

The stagnation in the third quarter had been forecast by the Bank of England, which now expects no growth in the UK economy for much of the next year.

Analysts believe the figures may now convince the Bank of England's rate-setting Monetary Policy Committee (MPC) that raising interest rates from 0.1 per cent to 5.25 per cent in fewer than two years is enough to bring down inflation to its 2 per cent target.

Stagflation fears

“A stagnant economy in the third quarter reflects the many challenges the country faced over the summer when wet weather and continued industrial action dented activity while soaring borrowing costs and stubborn inflation forced more households to rein in expenditure,” said Alice Haine, personal finance analyst at Bestinvest.

“The dismal quarterly data will reignite fears that the UK economy might be heading into a recession – defined by two successive quarters of contraction – as higher interest rates weigh on demand in the run-up to Christmas.”

Stuart Cole, lead macro economist at Equiti Capital, said the gross domestic product numbers “go a little way towards alleviating fears that the UK is facing a recession, but will raise concerns instead that the UK is facing a protracted period of stagflation as growth buckles under the burden of interest rates that are set to remain high for some time”.

Meanwhile, business lobby groups said the government could do more to help companies now that higher interest rates are “starting to bite” and that UK Chancellor of the Exchequer Jeremy Hunt should announce measures to assist companies in his autumn statement in two weeks' time.

“Unlocking business investment across the economy by making full expensing permanent could – according to CBI analysis – lead to a 2 per cent increase to GDP by the end of the decade,” said Ben Jones, lead economist from the business lobby group the Confederation of British Industry.

Full expensing was announced by Mr Hunt in his March budget for the next three years, with an intention to make it permanent. It enables companies to claim back the cost of investing in IT equipment and machinery by writing it off against tax on their profits.