Chancellor Jeremy Hunt has warned of a “tough road ahead” as the UK made the first step towards recession.
The economy contracted by 0.2 per cent between July and September as soaring prices hit businesses and households, according to the Office for National Statistics.
It means gross domestic product (GDP) - a measure of the health of the economy - was in negative territory for the July-September period as a whole.
A recession is when the economy shrinks for two three-month periods in a row. The UK is now expected to be in a recession by the end of the year and the Bank of England has warned it will be the longest on record.
Hunt warned of “extremely difficult decisions” less than a week before he is due to deliver his big Autumn statement.
“We are not immune from the global challenge of high inflation and slow growth largely driven by Putin’s illegal war in Ukraine and his weaponisation of gas supplies,” Hunt said on Friday.
“I am under no illusion that there is a tough road ahead – one which will require extremely difficult decisions to restore confidence and economic stability. But to achieve long-term sustainable growth, we need to grip inflation, balance the books and get debt falling. There is no other way.
“While the world economy faces extreme turbulence, the fundamental resilience of the British economy is cause for optimism in the long run.”
Hunt’s statement on Thursday, November 17, is widely expected to include big spending cuts and tax rises.
The country could be facing another round of austerity policies such as those seen during the George Osborne era after the last recession.
The Times reported on Friday that Rishi Sunak and Jeremy Hunt intend to slow increases in spending after 2025 from the planned 3.7 per cent to as little as 1 per cent.
The aim is to fill a £55 billion black hole in the public finances by 2027-28, saving an estimated £25 billion a year.
However, journalists pointed out that such cuts would be scheduled for after the next general election and described them as “semi fiction”.
A recession has been forecast in the UK for some time due to the soaring prices of goods such as food, fuel and energy.
Confederation of British Industry called on the government to “learn the lessons” of the last decade, in the wake of the GDP figures.
Alpesh Paleja, a CBI lead economist, said: “The autumn statement must learn the lessons of the 2010s: fiscal sustainability and lifting trend growth are both immediate priorities.”
The Federation of Small Businesses called the latest GDP figures “dreadful news”.
National chairman Martin McTague said: “Confirmation of a shrinking economy is dreadful news for small businesses that have been facing increasing recessionary pressures for months now.”
Shadow chancellor Rachel Reeves described the latest figures as “extremely worrying”.
The Labour MP said: “Today’s numbers are another page of failure in the Tories’ record on growth, and the reality of this failure is family finances crunched, British businesses left behind and more anxiety for the future.
“Britain’s unique exposure to economic shocks has been down to a Conservative-led decade of weak growth, low productivity and under-investment and widening inequality.
“We’re already set to be near the bottom of global league tables on growth, but all the Tories offer yet again is austerity.”
Reeves said Labour’s Green Prosperity Plan would get the economy “firing on all cylinders”.
The Lib Dems accused the government of leaving the UK economy “smaller and all of us poorer”.