The UK economy grew more slowly than expected in July as worker shortages and soaring costs weighed on activity amid the heightened risk of recession.
The Office for National Statistics said gross domestic product (GDP) rose by 0.2% in July, after a sharp fall of 0.6% in June when the additional bank holiday for the Queen’s platinum jubilee led to a decline in activity.
City economists had forecast a stronger 0.4% recovery after the fall a month earlier. Reflecting weakness in the economy, GDP growth was flat over the three months to July, with a slump in the UK’s dominant service sector offset by stronger activity in industrial production and construction.
Yael Selfin, the chief economist at KPMG UK, said the “feeble” growth rate in July suggested the economy remained smaller than in May, reflecting a weak summer amid growing concerns over the cost of living.
“This ties into a downbeat outlook for the UK economy which could see another shallow recession from the end of this year, driven by the ongoing squeeze on households’ income and a rising cost burden for businesses,” she said.
The figures come amid growing concern over the strength of Britain’s economy as soaring living costs weigh on households’ spending power. The Bank of England has warned high inflation fuelled by rising energy bills will probably plunge the economy into a lengthy recession this winter.
In her first week as prime minister, Liz Truss announced plans to freeze household energy bills and provide support for businesses in a package of measures to soften the blow from rising prices worth more than £150bn. Economists expect the support will probably prevent a higher peak for inflation and reduce the severity of the looming recession.
It comes as businesses curtail events during the national mourning period after the death of Queen Elizabeth II last week, while the Bank has pushed back a decision on raising interest rates on Thursday by a week, to 22 September, in a mark of respect. Faced with soaring inflation, the central bank is expected to raise borrowing costs by at least 0.5 percentage points from the current rate of 1.75%, despite the mounting risks to growth.
Economists said the extra public holiday for the Queen’s funeral next week would have potential to weigh on growth in September, as the hospitality and tourism sector would unlikely benefit, while many businesses would be shut.
Samuel Tombs, the chief UK economist at the consultancy Pantheon Macroeconomics, forecast a 0.2% fall in GDP in September. “That suggests that a technical recession – widely defined as two quarters of declining GDP – is hanging in the balance,” he said.
According to the latest snapshot from the ONS, record temperatures in July had an effect on the economy, with the weather being reported as a reason for increased turnover in ice-cream manufacturing, amusement parks, and sales of water coolers.
The services sector grew by 0.4% overall, boosted partly by the UK hosting both the Women’s Euro 2022 contest and the Commonwealth Games.
In the hottest month since 1884, with a temperature of 40C exceeded in the UK for the first time, the ONS said the production sector also recorded a sharp fall in activity due to reduced gas and electricity power generation.
With inflation at the highest level since the 1980s, driven by soaring costs for energy amid Russia’s war in Ukraine, high prices hit the construction sector where there was a 0.8% fall in activity in July, after a 1.4% decline a month earlier.
Prices for concrete, plaster, bricks, sand, gravel and asphalt were a problem for the industry in particular, holding back the sector despite continued demand for building work in the economic recovery from the Covid pandemic.
Jake Finney, an economist at the accountancy firm PwC, said: “Despite today’s positive growth figures, our expectation is that the UK economy will contract in the third quarter of 2022, following its 0.1% contraction in the second quarter. This would mean that the UK enters a technical recession for the first time since lockdown restrictions ended.”