The quarterly contraction was less than expected — economists polled by Bloomberg had expected a 0.5 percent drop — and after the announcement, 10-year UK government bond yields fell briefly before rising slightly again to 3.36 percent.
The Bank of England has emphasized its determination to halt the upward march by raising interest rates, even at the risk of sending the economy into recession. Last week, the bank raised its key rate again, forecasting that the UK economy would contract in the second half of this year and continue to contract until mid-2024, leading to what it called a ‘prolonged’ recession.
By contrast, the European Union predicted a “short-lived and not overly deep” recession.
A recession is traditionally defined as several months of a significant decline in economic activity.
Higher interest rates, making borrowing money for mortgages and investments more expensive, curb spending by both businesses and consumers and could increase unemployment.
Yet the UK economy is also suffering from a series of self-inflicted wounds by the ruling Conservative Party. A widely criticized economic plan proposed in September by former prime minister Liz Truss that included steep, unfunded tax cuts and large spending hikes to help households pay rising energy bills sent financial markets shattered.
The political and economic instability that followed eventually resulted in a stunning policy reversal and the resignation of Ms. Truss. Rishi Sunak, the new Prime Minister, and Mr. Hunt are scheduled to announce their economic game plan next week, and it is expected to include tax hikes, spending cuts and debt reduction.
The package “will bolster Britain’s bleak economic outlook,” Pantheon Macroeconomics predicted.
There are other signs of economic weakness. Christmas lights are coming on across London, but fewer consumers visited shopping centers and high streets across the country last week compared to the previous week, the national statistics office reported. Consumer confidence is hovering around record lows as businesses report a decline in orders. The number of people wanting to buy a house fell last month as mortgage rates rose.