U.K. Economy Shrinks as Threat of Recession Nears

The ride down may be shallow or steep, but either way, the European Union and Britain could be starting to slide into recession.

The British economy shrank by 0.2 percent over July, August and September compared to the previous three months, the Office for National Statistics reported on Friday. It is a decline that is expected to continue and spread to the continent by the end of the year.

Many countries are likely to enter a recession in last three months of 2022, Paolo Gentiloni, the European Union’s commissioner for the economy, said on Friday. “The E.U. economy is at a turning point,” Mr. Gentiloni said. “Recent survey data points to a contraction for the winter.”

But while central bankers in Britain have warned of a “prolonged” recession lasting up to two years, the European Union predicted that the 27 member-bloc, by contrast, will face a “short-lived and not excessively deep” one.

Indeed, Mr. Gentiloni said he expected the union would end 2022 with better-than-expected 3.3 percent growth, although that total is likely to significantly weaken next year, to just 0.3 percent.

The divergent outlooks illustrate how the economic fallout from the pandemic and the Russian invasion of Ukraine are having an uneven impact on the region’s smorgasbord of countries.

Britain and Europe are suffering from the twin plagues of rising inflation and slowing or declining growth. The war and retaliatory sanctions against Russia, one of the world’s biggest energy and grain producers, has caused global fuel, food and fertilizer prices to soar. Supply chain disruptions rooted in the pandemic and ongoing Covid-19 lockdowns in China — most recently in the manufacturing hub of Guangzhou — have added to the pile of economic problems, as have climate-related disasters.

In Germany, Europe’s largest economy, the annual inflation rate, according to one measure, reached 10.4 percent in October. In Britain, inflation hit 10.1 percent in September, the highest level in 40 years, and is expected to rise even more before peaking. Call-in radio talk shows on the BBC are dominated by people who are anxious about being able to afford to heat and light their homes.

“There is a tough road ahead,” Jeremy Hunt, the chancellor of the Exchequer, declared on Friday, “one which will require extremely difficult decision to restore confidence and economic stability.”

The national statistics office’s preliminary estimates showed that the slowdown in Britain was broad — including the production and services sectors — and meant that the country’s gross domestic product, or total output, continued to remain below its prepandemic level. The drop-off was particularly sharp in September, down 0.6 percent from the previous month, although that number was affected by the death of Queen Elizabeth II, which prompted widespread, unplanned business closures.

The quarterly contraction was less than expected — economists surveyed by Bloomberg had expected a 0.5 percent decline — and after the announcement, 10-year British government bond yields briefly dropped before rising somewhat to 3.33 percent.

A recession is traditionally defined as several months of a significant decline in economic activity.

The Bank of England has emphasized its determination to halt inflation’s upward march by raising interest rates even at the risk of throwing the economy into a recession, although it has signaled that it is unlikely to raise rates as high as traders had expected. Last week, the bank once again lifted its key rate, and predicted that the British economy would contract in the second half of this year and continue to shrink until the middle of 2024.

Higher interest rates, which make borrowing money for mortgages and investments more expensive, curb spending by both businesses and consumers and can increase unemployment.

Yet Britain’s 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 Liz Truss, the former prime minister, which included steep, unfunded tax cuts and big spending increases to help households afford rising energy bills, sent financial markets into a tizzy.

The political and economic instability that ensued ultimately resulted in a stunning policy reversal and Ms. Truss’s resignation. 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 increases, spending cuts and debt reduction.

The package “will reinforce Britain’s grim economic outlook,” Pantheon Macroeconomics predicted.

There is also wide agreement among economists and analysts that Britain’s decision to leave the European Union in 2016 was a major and long-lasting blow to its economy.

Very few countries in the European Union are expected to fall into the negative growth range next year, but the outlook for Germany, which has been hit hard by the loss of Russian pipeline gas, is grim. The E.U. estimates that its economy will shrink by 0.6 percent in 2023.

Across Europe, inflation is expected to persist at higher levels than previously forecast. A strong labor market remains what Mr. Gentiloni called “a bright spot.”

The picture is darker in Britain, where long-term illnesses are keeping roughly 2.5 million people out of the work force, leaving employment below what it was before the pandemic.

Across London Christmas lights are going up, but throughout the country fewer consumers visited shopping centers and main streets last week compared with the previous week, the statistics office reported. Consumer confidence is hovering near record lows, while businesses are reporting a decline in orders. The number of people looking to buy a house dropped last month as mortgage rates rose.

“The U.K. economy has slipped to the back of the G7 pack again,” Pantheon wrote in its daily newsletter, referring to a group of some of the world’s biggest advanced economies.