The UK economy stagnated in the third quarter as the services sector contracted and production was flat, official figures revealed yesterday, with economists flagging a continued danger of recession.

The data from the Office for National Statistics show that, having been unchanged quarter-on-quarter in the three months to September, UK gross domestic product was up just 0.6% on the same period of last year. Services output fell by 0.1% quarter-on-quarter in the three months to September.

Investment bank Morgan Stanley - while noting that the GDP figures for the third quarter were stronger than both the consensus forecast and its expectations with “net trade and inventories masking very weak domestic demand” - declared it saw a “decent chance of a downwards revision” of third-quarter output in subsequent readings.

Bruna Skarica, UK economist at Morgan Stanley, said in a note titled “UK GDP - weak under the hood”: “Overall, the risks of a technical recession at the turn of the year are still large, although barring a severe deterioration in the global outlook, any further correction is likely to be relatively mild, we think.

“On the whole, momentum looks soft and we see downside risks rising, as the policy drags counter positive real wage growth.”

She added that Morgan Stanley saw “no more hikes” in base rates from the Bank of England, and expected “the cutting cycle to start next year - we think as early as May”.

The Bank of England has hiked UK base rates from a record low of 0.1% in December 2021 to 5.25%.

Thomas Pugh, economist at accountancy firm RSM UK, said: ‘The economy avoided contracting by the skin of its teeth in Q3.”

While projecting a return to growth in the fourth quarter, Mr Pugh said: “However, the big picture is still one of a stagnating economy. We doubt growth will materially pick up until towards the end of next year, meaning that the spectre of recession will hang over the UK economy for a long time yet.”

Trade credit insurance provider Allianz Trade said its growth forecast for 2023 as a whole for the UK, of 0.3%, was unchanged in the wake of the third-quarter GDP data.

It forecasts expansion of 0.6% in 2024. And Allianz Trade projects growth of 1.5% in 2025, still a weak rate by historical standards.

Rob Morgan, chief investment analyst at stockbroker Charles Stanley, said: “Having eked out quarterly growth of 0.3% and 0.2% during the first and second quarters of 2023, the UK economy stagnated in the third quarter, proving a little more resilient than expected, flatlining rather than falling, as inclement weather in July and August dampened activity. Consumer spending has so far been held up by lower fuel prices alongside low unemployment levels and strong wage growth, though these factors may not be enough to stave off tighter financial conditions and recessionary pressures in coming months.

“The full impact of previous interest rate increases is yet to be felt by some households and businesses that secured their debt in a much lower rate environment. Monetary policy has therefore had a significantly lagged effect on the economy as fixed-rate mortgages and loans run to their terms. As earlier turnings of the interest rate screw show up more clearly in economic data, we can expect the picture to weaken further as interest rates remain in restrictive territory to ensure inflationary pressures are vanquished.”

He added that the third-quarter GDP data “will be influential in the Bank of England’s December monetary policy outlook, and it most likely means a holding pattern for interest rates”.

Mr Morgan added: “While economic cracks are appearing, overall activity is holding up reasonably well, which means inflationary pressures may not abate quite as quickly as the BoE would like. The numbers aren’t strong enough to bring a further rate rise from the current 5.25% into play, but it will temper calls for earlier cuts a little too.”