Britain may already be in recession as shares lag eurozone

Recession fears have also weighed on British shares this year: The Ftse-100 has been left behind, with the worst performance for the index relative to a eurozone stocks index since 1999

Shoppers on Oxford Street in London, ahead of Christmas Day: The British government insists the outlook for the economy is not as bad as the numbers suggest.

Britain's economy might already be in a recession, according to data that showed it shrank between July and September, shortly after chancellor of the exchequer Jeremy Hunt took the rare step of suggesting the Bank of England might cut interest rates to boost growth.

Gross domestic product contracted by 0.1% in the third quarter, the UK's Office for National Statistics, or ONS, said.

It had previously estimated that the economy was unchanged from the previous three months and economists polled by Reuters had mostly expected another unchanged reading.

Similarly, second-quarter GDP was now estimated to have been flat, a cut from a previous estimate of 0.2% growth.

However, there were some more upbeat signs about the economy in separate data also published which showed retail sales in November jumped by much more than expected, increasing by 1.3% from October, boosted by discount sales.

The boost to retail sales volumes reflected heavy discounting during the Black Friday sales promotions. Sales fell over the three months to November and were still below their pre-pandemic levels, the statistics office said.

Sterling rose against the dollar and the euro immediately after the data releases.

Mr Hunt — whose Conservative Party is lagging far behind the opposition Labour Party in opinion polls with an election expected next year — took the unusual step of commenting on the Bank of England's interest rate decisions.

"There's a reasonable chance that if we stick to the course we're on, we're able to bring down inflation, the Bank of England might decide they can start to reduce interest rates," Mr Hunt said in an interview with the Financial Times. 

The Bank of England has stressed that it is premature to talk about cutting interest rates although a recent slowdown in Britain's high rate of inflation has helped to fuel bets in financial markets that its bank rate could fall to as low as 3.75% by the end of next year, from its current 15-year high of 5.25%.

After Friday's figures, Mr Hunt issued a statement saying the outlook for the economy was not as bad as the numbers suggested. The ONS said the broader picture for the economy was one of little change over the last year.

Britain's economy was now estimated to be 1.4% bigger than immediately before the covid pandemic struck in early 2020, however, the second weakest recovery in the Group of Seven economies after Germany.

Economists were split on whether the third-quarter contraction in the economy would prove to be the start of a recession as defined by two consecutive quarters of shrinkage.

Mild recession

Ashley Webb at Capital Economics said the data suggested a mild recession might have begun with the economy showing signs of struggling again in the fourth quarter and because much of the hit from higher borrowing costs was yet to filter through.

Samuel Tombs at Pantheon Macroeconomics predicted GDP would hold steady between October and December and households faced a better 2024 when inflation is due to slow further, the tax burden will be lightened and welfare benefits go up.

The data also showed British households had a bigger savings cushion in the third quarter with the savings ratio measuring the income that households saved as a proportion of their total available disposable income. 

Recession fears have also weighed on British shares this year. The Ftse-100 index has been left behind this year, despite ultra-cheap valuations. There have been no strong drivers for London's stock market, which has meant the worst performance for the index relative to a eurozone stocks index since 1999.

Meanwhile, the euro rose to a four-month high against the dollar, which came under selling pressure on growing expectations that US interest rates may fall in the coming months. The euro gained to $1.102, its highest since August 10.

The euro has climbed 1.2% against the dollar this month, with the vast bulk of the gains coming in the wake of the US Federal Reserve last week forecasting a pivot to interest-rate cuts that broadly weakened the greenback. 

That decision contrasted with European Central Bank policymakers cautioning investors against betting on imminent reductions. Money markets are pricing 1.62% of cuts from the ECB by the end of 2024, compared with 1% just over two weeks ago.

In the US, traders now see 1.58% of easing. 

Reuters and Bloomberg