Economic output fell 0.2 percent in the third quarter as the services and production industries slowed.

Britain’s economy has been hampered by the highest annual rate of inflation in 40 years, reaching 10.1 percent in September.
Credit…Sam Bush for The New York Times

Patricia Cohen

The British economy shrank over July, August and September, a troubling sign that the recession predicted by the nation’s central bankers may be beginning.

Gross domestic product, a measure of all the goods and services produced in Britain, fell by 0.2 percent in the third quarter of this year compared with the previous three-month period, according to preliminary estimates announced on Friday by the Office for National Statistics.

The slowdown was broad — including the production and services sectors — and meant that Britain’s 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 resulted in widespread, unplanned business closures.

Britain, like most countries in Europe, is suffering from the twin plagues of rising inflation and slowing or declining growth. The war in Ukraine and retaliatory sanctions against Russia, one of the world’s biggest energy and grain producers, has caused 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 also exacerbated economic difficulties, as have shifting consumer preferences and climate-related disasters.

In Britain, the annual inflation rate, according to one measure, reached 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.

The Bank of England has emphasized its determination to halt the upward march by raising interest rates even at the risk of throwing the economy into a recession. Last week, the bank once again lifted its key rate, and it predicted that the British economy would contract in the second half of this year and continue shrinking until the middle of 2024, producing what it called a “prolonged” recession.

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

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 Jeremy Hunt, the chancellor of the Exchequer, 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.