U.K. Economy Shrinks as Threat of Recession Nears

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 are other signs of economic weakness. Across London, Christmas lights are going up, but fewer consumers visited shopping centers and main streets throughout the country last week as compared with the previous week, the national 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. Long-term illnesses are also keeping roughly 2.5 million people out of the work force, which has left employment below what it was before the pandemic.

Britain’s economy is showing more weakness than many other European countries. Among the 19 countries that use the euro as currency, growth averaged 0.2 percent over July, August and September. In Germany, Europe’s largest economy, the Council of Economic Experts is projecting the country’s economic output to grow by 1.7 percent in 2022, and to decline by 0.2 percent in 2023.

“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.

Melissa Eddy contributed reporting from Berlin.