The UK economy flatlined between July and September, compared with the previous three months, as the impact of high interest rates and inflation weighed on consumers and businesses.
Illustrating what one economist called “a stagnation nation”, the Office for National Statistics said zero growth in gross domestic product in the third quarter followed 0.2% growth in the second quarter.
A slowdown in the property sector after a slump in house sales dragged down the services sector, while the transport sector was also hit by a downturn, indicating that firms cut back on shipping goods across the country.
Over recent months, most business surveys have shown falls in output and employment in reaction to falling consumer demand in the UK and elsewhere in Europe. An increase in interest rates has dampened consumer spending, with many retailers signalling that they are prepared for a difficult festive period.
Inflation was unchanged at 6.7% in September, reducing the spending power of many workers who received pay rises below the consumer prices index.
Suren Thiru, the economics director at the Institute of Chartered Accountants in England and Wales, said: “Flatlining quarterly UK GDP suggests that our economy lost momentum as the squeeze from inflation and higher borrowing costs suffocated output.”
Thiru, who overseas one of the largest surveys of business sentiment, said firms were downbeat about the outlook for the final three months of the year, which could be negative.
Responding to the GDP data, Jeremy Hunt said he planned to “knock inflation on its head” with an autumn statement on 22 November that would “focus on how we get the economy growing healthily again by unlocking investment, getting people back into work and reforming our public services so we can deliver the growth our country needs”.
The shadow chancellor, Rachel Reeves, said the figures showed the government was failing in its mission to revive the economy. “At the start of the year, Rishi Sunak and Jeremy Hunt promised to get the economy growing. These figures show that growth is flatlining and the British people are paying the price, with 25 Tory tax rises and higher mortgages,” she said.
That was echoed by James Smith, research director at the Resolution Foundation thinktank. “Britain is a stagnation nation that has struggled to secure sustained economic growth since the financial crisis,” he said. “Addressing this is the central task we face as a country, and must be at the heart of the chancellor’s autumn statement in 10 days’ time.”
The Bank of England last week left interest rates unchanged at 5.25% for a second time in a row, amid signs the UK economy is weakening. It had previously issued a run of 14 consecutive interest rates rises since the end of 2021.
Thiru said the weakness of the economy should persuade the central bank to begin cutting interest rates sooner than financial markets expect next August.
“These downbeat GDP figures suggest the Bank of England may have overdone the interest rate rises, and with that, the case for rate setters to pivot towards loosening policy is likely to strengthen,” he said.
Paul Dales, the chief UK economist at the consultancy Capital Economics, said the 0.4% quarter-on-quarter decline in consumer spending was the first since the fourth quarter of 2022 “and suggests higher loan rates are biting harder”.
There was better news from the professional, scientific and technical activities subsector, which grew by 0.6%, while the biggest area of growth was in the arts, entertainment and recreation sector, which increased by 2.3%. Growth was also driven by the health sector, which was supported by fewer strikes.
Economists polled by Reuters had expected a slightly worse third quarter, with a 0.1% contraction, but the economy grew by 0.2% in September, month on month, beating expectations of 0% growth.
