UK economy shrinks by 0.1% in second quarter as recession looms
Britain’s recovery from the pandemic stalled in the three months to June when the economy contracted by 0.1%, according to official figures that revealed the weakening outlook for the UK, which is expected to enter a recession later this year.
Exports fell and consumer spending contracted to push the UK closer to a long period of contraction that the Bank of England expects will stretch to the end of 2023.
The dip in output in the second quarter followed 0.8% growth in the first quarter and was driven by the health sector – as Covid testing and the vaccine programme was wound down – and by retail, as household spending fell, according to the figures from the Office for National Statistics (ONS).
Economists had forecast a bigger fall in output of 0.2% in the second quarter.
“Health was the biggest reason the economy contracted as the test-andtrace and vaccine programmes were wound down, while many retailers also had a tough quarter,” said Darren Morgan, a director of economic statistics at the ONS.
Gas and electricity drove an increase in production output in the second quarter, and construction rose, the ONS said.
Hotels, bars, hairdressers and wedding venues also provided a boost to counter the downward trend after they benefited from the return of outdoor events and the extended holiday for the Queen’s platinum jubilee. Business investment improved by 3.6% during the quarter.
However, a turnaround in some parts of the private sector was too weak to prevent the economy from shrinking by 0.6% month on month in June, after 0.4% growth in May, which the ONS said was explained partly by the dent to manufacturing, construction and business services from the jubilee holiday, which led to an additional working day in May and two fewer working days in June.
The Bank of England has forecast a modest bounceback in GDP in the third quarter to the end of September before a recession beginning in October that the central bank has predicted will last through 2023.
The National Institute of Economic and Social Research said the contraction in the second quarter meant a recession had already begun, brought about by a collapse in consumer confidence that has caused households to curtail spending, and a decline in activity across the services sector.
The cost of living crisis, as inflation heads towards 13% by the end of the year and energy bills soar, is expected to weigh heavily on household spending and pile further pressure on businesses already struggling with rising costs.
The chancellor, Nadhim Zahawi,
said that despite the fallout from the pandemic and high energy prices “the economy showed incredible resilience”.
He said he would be working with the Bank of England to bring inflation under control and “grow the economy”, adding that the government had provided direct financial support to offset the worst effects of rising energy bills, “including £1,200 for 8 million of the most vulnerable households.”
James Smith, a research director at the Resolution Foundation, said:“While the contraction in June partly reflects the timing of platinum jubilee bank holidays, the economy has started a difficult period on a weak footing. And with the Bank of England forecasting that inflation will rise above 13% in October, and that the economy will slip into recession in Q4, the outlook is bleak.
“The first priority for the new prime minister will be to provide further targeted support to low- and middleincome households, who will be worst affected by the stagflation that already seems to be taking hold.”
Exports fell by 8% in June to reverse two months of consecutive gains, the ONS said. Trade fell with the EU and the rest of the world as the trend for British goods exporters to miss out on a 20% rise in global trade during the pandemic continued.
William Bain, head of trade policy at the British Chambers of Commerce, said the UK was about to enter choppier waters as major economies in Europe and the US began to suffer downturns.
“June’s trade data ended what was a strong second quarter with a damp squib,” he said.
“There are gathering economic headwinds which all UK goods exporters now face,” he said, which revealed the risks of “weakening, instead of stabilising, trade relations with the EU”.
He added: “There is now an urgent need for real delivery by the UK government’s export strategy to support the growth ambitions of UK exporting businesses.”