UK economy contraction.

The UK is expected to confirm that the economy contracted by 0.2 per cent between the second and the third quarter, marking the start of what many economists expect to be a prolonged recession. The figures, published on Thursday by the Office for National Statistics, will contain further details on the economy and the current account. Ellie Henderson, an economist at Investec, expects the data to show further falls in real household disposable income as wage increases fail to match inflation, «a matter which has prompted much of the industrial action across the country as of late». She also expects a further fall in the household saving ratio from 7.6 per cent in the second quarter.

This is because «household budgets are becoming increasingly squeezed and considering the cost of living crisis, a greater proportion of household income is being diverted to cover essential consumption», she explained. As a result, the UK current account deficit is expected to have narrowed, with economists polled by Reuters forecasting a gap of £20.1bn in the third quarter, down from £33.8bn, or 5.5 per cent of gross domestic product, in the second quarter. Softening US consumer spending has been critical to the Federal Reserve’s efforts to tame inflation. Last week US consumer price inflation eased more than expected in November to its lowest level in almost a year, while US retail sales fell more than expected, with a 0.6 per cent monthly drop marking the most significant monthly decrease since December 2021.

This clashes with the slight brightening of prospects for the German economy in recent weeks after the country was able to fill its gas storage facilities surprisingly quickly, and overall output continued to grow more than expected in the third quarter. As a result, the Ifo upgraded its forecast for the German economy last week, predicting it would contract 0.1 per cent next year, compared with its previous forecast in September for it to shrink 0.3 per cent. «A cold snap has gripped Europe, gas inventories are falling, and wholesale energy prices have snapped back,» said Claus Vistesen, an economist at Pantheon Macroeconomics.

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