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Britain’s economy flatlined in the three months to September, as high interest rates hammered household spending and business investment.
The lack of growth will serve as a blow to Chancellor Jeremy Hunt as he prepares for this month’s Autumn Statement.
Friday’s stagnated growth was an improvement on analyst expectations of a 0.1pc drop, meaning Britain dodges a technical recession this year, although economists warned the outlook for the UK economy remains weak.
A recession is defined as two consecutive quarters of negative GDP.
Yael Selfin, chief economist at KPMG UK, said: “Economic activity is continuing to slow as high interest rates are weighing on consumer sentiment and disposable incomes. While real incomes have started to grow as inflation eases, this is being offset by higher mortgage rates feeding through into housing costs.
“Investment momentum has started to fade following a strong performance in the first half of this year, with a weakening residential market impacting the housing sector, while uncertainty around demand is dampening business investment.”
On a month-by-month basis, the Office for National Statistics said the economy grew by 0.2pc in September, after a rise of 0.1pc in August and a sharp drop of 0.6pc in July, when strikes and wet weather hit output.
Over the quarter as a whole, the services sector – which makes up most of the economy – shrank by 0.1pc, with consumer-facing services falling by 0.7pc, in a sign households are feeling the squeeze.
Real estate activities dropped 0.4pc, with higher mortgage rates hitting the housing market.
Household spending fell 0.4pc, after adjusting for higher prices, while business investment plunged 4.2pc. Government consumption also slid, with lower spending on healthcare and education in the quarter, in part due to strikes.
Net trade supported GDP, with a rise in services exports and a fall in the import of goods, particularly machinery and transport equipment.
Overall, it means growth petered out completely after GDP rose by 0.2pc in the second quarter of the year.
James Smith, economist at ING, said “the economy was rescued by net imports” in the last quarter.
He said: “It’s been a fairly wild few months for several key sub-sectors of the GDP figures. June saw a massive 0.7pc rise in activity, owing to a highly unusual surge in manufacturing. And July saw a corresponding 0.6pc drop as that production boost partly unwound, but also on a number of public sector strikes in health and education.
“What’s happened since – with GDP growing by 0.1pc in August and 0.2pc in September – is as much about those trends unwinding as it is about genuine economic activity growth.”
The Resolution Foundation said Britain is still at risk of recession.
“The UK economy has stagnated again in recent months, driven in part by the rapid rise in interest rates since late 2021. There is a real risk that the UK could fall into recession for the fourth time in 15 years,” the think tank said.
“Britain is a stagnation nation that has struggled to secure sustained economic growth since the financial crisis. 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.”
High taxes are holding back growth, said Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales.
“The UK economy is in a tough period, with the lagged impact of previous interest rate rises, an onerous tax burden and a weakening jobs market likely to weigh heavily on GDP in the fourth quarter,” he said.
“A stuttering economy makes the Autumn Statement more difficult because it means weak tax receipts for the Government, while any notable fiscal loosening risks refuelling inflation pressures.”
Mr Hunt said he is focused on cutting inflation and supporting growth: “High inflation is the single greatest barrier to economic growth. The best way to sustainably grow our economy right now is to stick to our plan and knock inflation on its head.
“The Autumn Statement will 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.