UK Economy Shrinks, Hinting Start Of Recession

Updated on
  • UK economy shrank 0.2% between July and September, confirming we’re on track for recession by the end of the year
  •, Inc. (NASDAQ:AMZN) to cut costs as profits slip away
  • UK market set for a reasonably positive end to the week on strong gains in the US following inflation data
  • Brent crude set for weekly drop amid demand concerns

UK Economy Shrinks

UK recession is looking more likely as the economy shrank 0.2% in the three months to September. This essentially means we’re more firmly on track to be in a recession by the end of the year. The most notable downturns came from a slowing in the services sector, driven by a fall in consumer facing services.

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Production also fell sharply. The stark takeaway is that real household spending dropped 0.5%. This points to the tangible consequences of the cost-of-living crisis and is a trend likely to get worse before it gets better. It also has serious ramifications for companies relying on consumers spending on a discretionary basis.

At the same time, we’re living in a topsy turvy land where bad economic news is likely to be taken well by markets. If economies show signs of slowing down, it means inflation has a better chance of petering out, which in turn means policy makers won’t be forced to keep interest rate hikes as aggressive, or keep tightening programmes going for as long.

With that said, while the UK’s GDP did shrink, it was by less than expected. So, the jury’s likely to be out on whether this has been a deep enough dip to allay inflation fears just yet.

We’ve seen overseas markets surge in the wake of weaker than expected US inflation yesterday, with the 7.7% reading the reason the S&P 500 marched upwards to the tune of 5.5% in the latest trading session, while the tech-heavy Nasdaq soared 7.4%.

This rallying cry from the markets goes to show how sensitive investors are at the moment, with good news being very strongly rewarded. The US inflation beat is excellent for sentiment, but policy makers will still be concerned that inflation is now still very much entrenched in all areas of the basket.

Rising Shelter Costs

Shelter costs, which include things like mortgage payments, property insurance or building fees, are still climbing at an alarming rate, which is a dangerous trend being lost in the wider noise. The FTSE 100 is widely expected to have a spritely day itself, following in the fumes of celebration wafted over from the US last night.

Amazon’s jet fuelled expansion of the pandemic has come back to haunt it. Inflationary pressures and a highly uncertain economic outlook add to the concerns, where the world’s largest retailer already shocked investors in October when its third-quarter results fell short of Wall Street estimates.

Extreme competition from Walmart has also weighed and contributed to heavy losses. The cost cutting review is believed to be underway, but what this will mean is yet to be seen. Headcount reductions can’t be ruled out and something drastic is needed to get things moving.

Brent crude’s headed for a weekly loss with prices hovering around $95 a barrel. This comes as the weakening demand outlook overshadows concerns about supply. In particular, China’s zero Covid policies is severely denting demand.

As we know, these things can change very quickly, but for now at least, oil prices are heading in the right direction and this is a crumb of good news for consumers in these difficult times.

Article by Sophie Lund-Yates, Lead Equity Analyst at Hargreaves Lansdown