October 3, 2022
UK economy stagnates as cost of living crisis hits spending power

Britain’s economy stagnated in the three months to July, as the cost of living crisis hit household finances and business activity and growth fell short of expectations.

UK output was flat over the period, with a 0.3 per cent increase recorded in April in the three months to April, according to data released on Monday by the Office for National Statistics.

With the economy sizing up in July, as it was six months earlier, GDP fell short of a 0.1 percent expansion forecast by economists polled by Reuters.

UK growth has lost momentum since the start of the year as rising costs hit businesses and consumers. Inflation hit a 40-year high in July, reducing the amount of money people have to spend on goods and services.

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Production increased by 0.2 percent between June and July, reflecting a loss of two working days in June mainly associated with Queen Elizabeth II’s jubilee celebrations. The economy shrank 0.6 per cent in June, while the July rebound was weaker than investors’ expectations of a 0.4 per cent expansion.

“The disappointingly small rebound in real GDP in July suggests that the economy has little momentum and is probably already in recession,” said Paul Dales, UK chief economist at Capital Economics.

Some economists believe a freeze on the average annual household energy bill to £2,500 over the next two years, announced last week by new Prime Minister Liz Truss, will help support demand in the economy in the months ahead.

ING economist James Smith said the package of measures did not guarantee the economy would avoid slipping into a technical recession, but “should help limit the depth of any winter recession”.

However, with many households and businesses already struggling to make payments, the UK’s economic outlook remains weak, with plans to raise bills ahead of 1 October, when the energy price cap is raised.

“Families still face a further decline in their real income during the second half of this year,” said Martin Beck, chief economic advisor at EY Item Club. “As things stand, the economy is unlikely to do more than stabilize in the coming year.”

Economists expect the Bank of England to raise interest rates for the seventh time in a row at its next meeting, which is likely to lead to a further slowdown in consumer demand. Markets are pricing in a 79 percent chance of growth of 75-basis points from their current 1.75 percent.

According to the latest PMI index, economic activity has been shrinking since August, when consumer confidence fell to its lowest level since records began.

The services sector grew by 0.4 percent in July and grew in GDP. Meanwhile, production declined 0.3 per cent after a decrease of 0.9 per cent last month, with construction activity also recording two consecutive sharp contractions.

Separate data published by the ONS on Monday showed that deficit trading in goods and services, excluding precious metals, increased from £1.2bn to £27bn in the three months to July compared to the previous quarter, following comparable data. A close record from was first collected in 1997.

This expansion was due to the rising value of imports, reflecting rising energy prices due to Russia’s invasion of Ukraine and a weak export market.

With gas prices hitting a new high in August, exports are likely to continue to struggle as external demand from major trading partners softens and Brexit trade frictions persist.

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“The trade deficit will reach enormous proportions in the coming months,” said Gabriella Dickens, economist at Pantheon Macroeconomics.

According to the ONS, GDP in July was projected to be 1.1 percent above pre-pandemic levels. However, this figure does not factor in the revisions that impact the pandemic’s economy in 2020 more than initial expectations.

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