LONDON – The British economy shrank at the fastest pace in seven months in July as strikes and wet weather hit activity harder than expected, reviving fears that a recession may be under way.
Gross domestic product slipped 0.5 per cent month on month in July following a 0.5 per cent gain in June, the Office for National Statistics (ONS) said on Wednesday. Economists had expected a contraction of 0.2 per cent. Services, construction and manufacturing all shrank.
Britain’s economy, which the Bank of England (BOE) expects to stagnate at best for much of the next two years, is now losing steam in the face of a sharp increase in borrowing costs. That may give policymakers pause for thought when they decide next week whether to raise interest rates again in their fight to tame inflation.
“Underlying growth has lost momentum since earlier in the year,” said Mr Paul Dales at Capital Economics, noting a mild recession may in fact have begun. “This data suggests GDP growth in the third quarter as a whole is likely to fall well short of the Bank of England’s 0.4 per cent quarter-on-quarter forecast.”
That is bad news for Prime Minister Rishi Sunak, who faces the prospect of a general election next year with his Conservative Party lagging far behind the Labour opposition in opinion polls.
The pound fell after the report, trading at US$1.2458. Money markets are pricing in a quarter-point rise to 5.5 per cent with the possibility of a further increase by the year end. However, BOE governor Andrew Bailey has signalled that the most aggressive hiking cycle since the 1980s is almost complete.
The main cause of the contraction was the dominant services sector, which fell 0.5 per cent in July. Cool and rainy weather depressed retail sales during the month. Output was also dented as doctors, teachers and rail staff walked off the job in their disputes with the government over pay.
“The broader picture looks more positive, with the economy growing across the services, production and construction sectors in the last three months,” said Mr Darren Morgan, director of economic statistics at the ONS.
Activity in the information and communication sector also fell in July, particularly in computer programming and consultancy, after three consecutive months of growth. The ONS said strikes held back recruitment, especially in the National Health Service. Wet weather hurt retail sales, construction and outdoor venues.
Offsetting the falls in health, consulting and retail was a big increase in recreational experiences as people went out. The arts, recreation and entertainment sector grew by 6.6 per cent – the best growth since May 2021. Within that, sports, amusement and recreation activities grew by 12.4 per cent while creative arts and entertainment grew by 4.9 per cent.
There were also declines in other sectors, including construction and industrial production.
In construction, households cut back on repair and maintenance, a sign that inflation is eating into incomes. The sector shrank 0.5 per cent as a whole, largely due to a fall in demand among private housing. There was also a slowdown in the housebuilding sector. The ONS said the unusually cold and wet July weather may have been to blame.
Data on Tuesday showed the labour market, closely watched by the BOE for signs of persistent inflation, is cooling down.
The latest GDP estimate may well be revised later in September, when the ONS will release new estimates consistent with its “Blue Book” changes.
Those changes rewrote the narrative of the Covid-19 pandemic, with the economy larger than previously thought at the end of 2021 and above pre-pandemic levels. However, they provided no guide to how the economy has fared since then, a period of rising inflation and interest rates.
“Higher interest rates and sticky inflation are having a more significant effect on the economy,” said Mr Neil Birrell, chief investment officer at Premier Miton. “All eyes will be on the (BOE) for the announcement of the rate decision.” BLOOMBERG
