Economy shrinks unexpectedly in August by 0.3%, Office for National Statistics figures show
The economy unexpectedly shrank in August, contracting by 0.3% on the previous month.
The growth in July has also been revised downwards, from the previously recorded 0.2% to 0.1%.
The Office for National Statistics released its latest reading on the UK’s performance as the government frets over the prospect of recession ahead, given the toll placed on demand by the cost of living crisis.
The result for August is worse than expected, as no growth rather than shrinking was anticipated.
It is likely that the contraction will result in a sharper period of slowdown in September.
“August’s negative out-turn should be followed by a more marked drop in September’s output as the extra bank holiday for the Queen’s funeral will have added to the downwards pressure on activity,” Suren Thiru, economics director of the Institute of Chartered Accountants in England and Wales, said.
Commentators now suspect the UK is nearing a recession.
“UK economy teetering on the edge of recession,” Yael Selfin, chief economist at KPMG UK, said.
“The ongoing squeeze on household finances continues to weigh on growth, and likely to have caused the UK economy to enter a technical recession from the third quarter of this year.”
Mr Thiru added: “The government has needlessly risked a longer recession with any boost from the energy package likely to be dwarfed by a sustained squeeze on UK output from persistently high inflation, punishing interest rate rises and acute financial market turbulence.”
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “August’s drop in GDP likely marks the start of a downward trend that will continue deep into next year.”
The ONS figures were dismissed as estimates by Jacob Rees-Mogg, the business secretary, who told Sky News that “figures that are released immediately are very often revised”.
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Jacob Rees-Mogg on Kay Burley
Action by the Bank of England to tame inflation, through successive interest rate increases, is adding to the cost burden for borrowers.
The Bank’s tightening has placed its mandate to control inflation at odds with the agenda of the new Truss administration, which has set a target for annual economic growth of 2.5%.
The mini-budget last month, which contained energy bill help for households and businesses along with a series of tax cuts, prompted turmoil on financial markets.
The resulting crisis of credibility forced down the value of the pound and raised government borrowing costs to such an extent that the Bank had to intervene.
The International Monetary Fund warned on Tuesday that the government should ensure its tax and spending plans are in line with the Bank of England’s inflation-fighting remit.
In other words, the priority should be tackling inflation rather than adding to the price problem through tax giveaways to achieve economic growth.
The IMF welcomed the prospect of an earlier-than-expected debt plan from Kwasi Kwarteng, the chancellor.
That will now be delivered to MPs on 31 October and contain independent analysis from the Office for Budget Responsibility.
Responding to this morning’s announcement, Mr Kwarteng said the UK was facing global challenges that his government’s growth plan will address.
“Countries around the world are facing challenges right now, particularly as a result of high energy prices driven by Putin’s barbaric action in Ukraine,” he said.
“That is why this government acted quickly to put in place a comprehensive plan to protect families and businesses from soaring energy bills this winter.
“Our Growth Plan will address the challenges that we face with ambitious supply-side reforms and tax cuts, which will grow our economy, create more well-paid skilled jobs and in turn raise living standards for everyone.”
It is a trade deal that will “rebalance, but enable trade on both sides,” said Ursula von der Leyen after the EU and US struck a trade deal in Scotland.
It was not the most emphatic declaration by the president of the European Commission.
The trading partnership between two of the biggest markets in the world is in significantly worse shape than it was before Donald Trump was elected, but this deal is better than nothing.
As part of the agreement, European exports to the US will be hit with a 15% tariff. That’s better than the 30% the bloc was threatened with but it is a world away from the type of open and free trade European leaders would like. The EU had offered tariff free trade to the US just weeks before the deal was announced.
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Instead, it has accepted a 15% tariff and agreed to ramp up its energy purchases from the US.
The EU tariff on US imports will remain close to zero but Europe did get some important exemptions – on aviation, critical raw materials, some chemicals and some medical equipment. That being said, the bloc did not achieve a breakthrough on steel, aluminium or copper, which are still facing a 50% tariff. It means the average tariff on EU exports to the US will now rise from 1.2 % last year to 17%.
There is also confusion over the status of pharmaceuticals – an important industry to Europe. Products like Ozempic, which is made in Denmark, have flooded into the US market in recent years and Donald Trump was threatening tariffs as high as 50% on the sector.
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US and EU agree trade deal
It appears that pharmaceuticals will fall under the 15% bracket, even though President Trump contradicted official announcements by suggesting a deal had not yet been made on the industry. The risk is that the implementation of the deal could be beset with differences of interpretation, as has been the case with the Japan deal that Trump struck last week.
It also risks fracturing solidarity between EU states, all of which have different strategic industries that rely on the US to differing degrees. Germany’s BDI federation of industrial groups said: “Even a 15% tariff rate will have immense negative effects on export-oriented German industry.”
The VCI chemical trade association said rates were still “too high”. For German carmakers, including Mercedes and BMW, there was some reprieve from the crippling 27.5% tariff imposed by Trump. The industry is Europe’s top exporter to the US but the German trade body, the VDA, warned that a 15% rate would “cost the German automotive industry billions annually”.
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Who’s the winner in the US-EU trade deal?
Meanwhile, François Bayrou, the French Prime Minister, described the agreement as a “dark day” for the union, “when an alliance of free peoples, gathered to affirm their values and defend their interests, resolves to submission.”
While the deal has divided the bloc, the greater certainty it delivers is not to be snubbed at.
Markets bounced on the news, even though the deal will ultimately harm economic growth.
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‘Millions’ of EU jobs were in firing line
Analysts at Oxford Economics said: “We don’t plan material changes to our eurozone baseline forecast of 1.1% GDP growth this year and 0.8% in 2026 in response to the EU-US trade deal.
“While the effective tariff rate will end up at around 15%, a few percentage points higher than in our baseline, lower uncertainty and no EU retaliation are partial offsets.”
However, economists at Capital Economics said the economic outlook had now deteriorated, with growth in the bloc likely to drop by 0.2%. Germany and Ireland could be the hardest hit.
While the US appears to be the obvious winner in this negotiation, uncertainty still hangs over the US economy.
Trump has not achieved his goal of “90 deals in 90 days” and, in the end, American consumers could still bear the cost through higher prices.
That of course depends on how businesses share the burden of those higher costs, with the latest data suggesting that inflation is yet to rip through the US economy. While Europe determined on Sunday that a bad deal is better than no deal, some fear that the worst is yet to come for the Americans.
The United States and European Union have agreed a trade deal, says Donald Trump.
The announcement was made as the US president met European Commission chief Ursula von der Leyen at one of his golf resorts in Scotland.
Speaking after talks in Turnberry, Mr Trump said the EU deal was the “biggest deal ever made” and it will be “great for cars”.
The US will impose 15% tariffs on EU goods into America, after Mr Trump had threatened a 30% levy.
He said there will be an EU investment of $600bn in the US, the bloc will buy $750bn in US energy and will also purchase US military equipment.
Mr Trump had earlier said the main sticking point was “fairness”, citing barriers to US exports of cars and agriculture.
He went into the talks demanding fairer trade with the 27-member EU and threatening steep tariffs to achieve that, while insisting the US will not go below 15% import taxes.
For months, Mr Trump has threatened most of the world with large tariffs in the hope of shrinking major US trade deficits with many key trading partners, including the EU.
Ms von der Leyen said the agreement would include 15% tariffs across the board, saying it would help rebalance trade between the two large trading partners.
In case there was no deal and the US had imposed 30% tariffs from 1 August, the EU has prepared counter-tariffs on €93bn (£81bn) of US goods.
Ahead of their meeting on Sunday, Ms von der Leyen described Mr Trump as a “tough negotiator and dealmaker”.
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