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UK economy ‘flipped into reverse’ in June as recession a ‘foregone conclusion’

  • 12/08/2022
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The UK economy shrank 0.6 per cent in June, less than the 0.9 per cent decline the market was expecting, but the grim reality of recession looms for the end of the year.

Gross domestic product (GDP) measures the value of goods and services produced in the UK. It estimates the size of, and growth in, the economy.

The fall in the GDP in June comes after a growth of 0.4 per cent in May, revised down from 0.5 per cent, according to the Office for National Statistics (ONS).

Overall, in the three months to 30 June, the UK economy contracted 0.1 per cent which was above the market consensus of a 0.2 per cent fall. However, the figure was up 1.9 per cent in the 12 months to June 2022.

According to the ONS, moving the May bank holiday for the Queen’s Platinum Jubilee led to two fewer working days in the month which could have had an effect.

Figures show services fell 0.5 per cent in June and were the main driver of the fall in GDP. A drop in human health activities was the largest contributor as test and trace activity decreased further and vaccinations tailed off after the spring booster campaign.

Production was down 0.9 per cent, following a 1.3 per cent increase in May. The ONS noted this was mainly due to a decrease of 1.6 per cent in manufacturing. Construction also contracted 1.4 per cent, ending its seven consecutive months of growth.

Further, output in consumer-facing services stayed flat in June 2022, following a fall of 0.3 per cent in May. Consumer-facing services were 4.9 per cent below their pre-pandemic levels in June 2022, while all other services were 2.7 per cent higher.

‘Stop-start recovery’ is a ‘grim reality’ in light of recession

Samuel Fuller, director of Financial Markets Online, said: “The UK economy slammed on the brakes in the second quarter, not helped by war, inflation and extra holidays. GDP may have beaten expectations by a whisker but, having flipped into reverse, that’s not going to count for very much.

“There may be good reasons for this readout but the stop-start recovery is still a grim reality with recession bearing down.”

He added that Andrew Bailey, governor of Bank of England, had set “poor expectations” for the UK economy for the next 18 months, and that recession was a “foregone conclusion”. He noted that the risk was that the recession could be “deeper than it needed to be”.

Fuller continued: “Businesses everywhere will now be planning their hiring and investment strategy around a pretty torrid 2023. That’s been putting the pound under pressure while the Bank of England interest rates will continue to rise.

“With sterling already pretty weak after a sustained slump against the dollar, the pound didn’t react too badly. With the US already in technical recession the UK’s in good company and it’s still very unlikely the UK will post a second consecutive contraction in Q3.”

He warned that because inflation was predicted to climb above 13 per cent by the end of Q4, it would “continue to be bumpy from here”.

“The inflation fight is top billing and the economy is just going to be dragged along with it.”

Renewed attention on interest rates

Jonathan Moyes, head of investment research at Wealth Club, said today’s figures will bring attention back to the Bank of England and the path of interest rates.

“The current inflationary spike is being driven overwhelmingly by global food and energy prices which, by and large, are outside of the Bank’s control. Higher interest rates in the UK will do little to alleviate those pressures. By looking to stave off any knock-on inflationary pressures, such as higher wages, the Bank risks strangling the life out of the economy without significantly easing the cost-of-living crisis.

“Whilst the Bank expected a slight contraction in Q2 GDP, the mounting weakness in the UK economy may give it pause for thought before continuing to lift rates higher,” he said.

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