Europe

UK GDP rebounds slightly in July yet recession fears remain

Queen's four children surround her coffin at Edinburgh vigil

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The UK economy recovered in July to expand by 0.2 percent according to new data released by the Office for National Statistics, yet fell short of analysts’ predictions. The previous month, GDP had shrunk by 0.6 percent, in large part contributing to the UK’s negative growth for the second quarter of 2022, prompting fears of an imminent recession. Although the news is positive, analysts are now forecasting the impact of an extra bank holiday for the Queen’s state funeral and 10 days of national mourning will further damage economic growth.

The UK’s monthly real gross domestic product (GDP) – the value of all goods and services produced in the country – is estimated to have grown by 0.2 percent in July.

The services sector – which makes up 80 percent of the economy – was the main driver of growth, expanding by 0.4 percent during the month, in particular thanks to the contribution of information and communication services which grew by 1.5 percent.

As a result, monthly GDP is now estimated to be 1.1 percent higher than its pre-pandemic level.

However, both the production and construction sectors continued their decline from the previous month, contracting by 0.3 and 0.8 percent respectively.

Whereas GDP fell by 0.6 percent in June, attributed to the extra bank holiday taken to mark the Queen’s Platinum Jubilee, in July the Women’s Euro Championships and the Commonwealth Games provided a boost.

Monthly GDP grew 2.3 percent between July 2021 and July 2022, up from 1.9 percent between June 2021 and June 2022.

However, July’s growth figure falls short of the 0.4 percent forecast by economists, who expected a stronger rebound from June.

Revealing the true fragility of the economy, GDP growth was flat in the three months to July compared with the previous three months.

Commenting on the figures, Danni Hewson, AJ Bell financial analyst said: “July boasted record temperatures and as lots of people flocked to the beach, the park or outdoor pools to enjoy a little respite from the heat, many service businesses benefited. Ice creams were consumed, sun cream was slathered on and beer gardens overflowed.

“Sporting events distracted people from their personal budgeting headaches and the incredible success of the Women’s England team bathed the country in a warm glow.

“But even in celebration there was an undertone of caution and July’s rather anaemic growth came in below expectations, a factor which will add to concerns that the UK is slow marching towards recession.

“Despite the package of support for households, which has just been announced by the government, the cost of living crisis hasn’t magically disappeared.

“Energy costs are just one part of the equation – food prices, fuel prices and pretty much every single service we use has gone up and, even if inflation doesn’t peak at those eyewatering levels we’d been warned of, budgets are still very tight.”

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Indeed, the cost-of-living crisis has now been raging for many months, hampering the spending ability of UK households, and shows no signs of subsiding, with inflation in July entering double digits for the first time since the Eighties.

Early last month, the Bank of England (BoE), in increasing interest rates by a 27-year record single-day hike to 1.75 percent, announced their expectation of 13.3 percent peak in October.

These predictions were soon shattered by the likes of Citi group, who forecast 18 percent inflation in the first quarter of 2023, and Goldman Sachs, who warned of 22.4 percent inflation were energy prices allowed to continue soaring.

Economists across the board are expecting a recession to take hold by the end of they year, with accountancy firm PwC predicting UK GDP growth to average between 3.1 percent and 3.6 percent for the year, followed by two years of slow or even negative growth.

In her first week as British Prime Minister, Liz Truss announced her Government’s plans to cap household energy bills at £2,500, in a scheme that will see the Government front the difference with providers at an estimated cost of up to £150billion.

Huw Pill, the Bank of England’s chief economist, last week told the Treasury Committee that the Prime Ministers measures will “weigh on inflation” and stop it from surpassing the 13.3 percent they had predicted in August.

Research consultantcy Capital Economics dubbed the package an “effective but expensive sticking plaster”.

The group estimated inflation would now peak closer to 11 percent in October and that the UK economy would still most likely enter a recession, but that the contraction would be less severe.

Other economists have said the Government’s price cap plan, along with the pledged reversal of April’s 1.25 percent National Insurance hike, may result in some short-term growth.

However, analysts have said the extra public holiday announced for the Queen’s state funeral next Monday, September 19, as well as 10 days of national mourning, could push the UK closer to recession sooner.

With many businesses shut, the hospitality and tourism sectors are unlikely to benefit from the additional leisure day for consumers.

Speaking to the Guardian, Samuel Tombs, chief UK economist at Pantheon Macroeconomics, forecast a 0.2 percent fall in GDP in September, saying: “That suggests that a technical recession – widely defined as two-quarters of declining GDP – is hanging in the balance.”

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