UK economy contracted in second quarter amid cost of living crisis – business live

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Please do remember: this is not a technical recession (yet)!

Economists generally count two successive quarters of contraction as a recession. So if activity is declining again in the current quarter then it would qualify.

The Bank of England thinks the worst is ahead, as energy price rises begin to bite properly.

Economy found a reverse gear in June but Bank of England forecasts recession won’t begin until the winter.

This is based assumption:

1) energy cap rises to £3500 in Oct + remains elevated.
2) interests rise to peak at 3% next summer
3) no additional government support


— Joel Hills (@ITVJoel) August 12, 2022

It should be remembered that the GDP reading is not quite as bad as economists had expected.

A poll of economists earlier in the week suggested there could be a 0.2% decline.

But one group who will be grimacing looking at today’s reading is the Bank of England, who did not expect a contraction in the UK economy to start until the final three months of 2022.

You can see how economic activity has peaked (at least temporarily) in the below chart from the ONS.

A graph showing that GDP dipped in the second quarter after the rapid coronavirus recovery tailed off.
GDP dipped in the second quarter after the rapid coronavirus recovery tailed off. Photograph: Office for National Statistics

Nadhim Zahawi, the chancellor (for now, at least) is quick out of the blocks with a comment. He said:

Our economy showed incredible resilience following the pandemic and I am confident we can pull through these global challenges again.

I know that times are tough and people will be concerned about rising prices and slowing growth, and that’s why I’m determined to work with the Bank of England to get inflation under control and grow the economy.

The government is providing billions of pounds of help for households with rising costs, including £1,200 for eight million of the most vulnerable households.

The big contributors to the fall in activity included a 0.4% decline in the UK’s dominant services sector, in which activity slumped because of the end of many of the pandemic-related services such as test-and-trace.

There was a 0.2% decrease in real household consumption in the second quarter, the ONS said – a sign that people are feeling the financial pinch.

And of course we already know that inflation is here, but the GDP figures confirm that. The implied GDP deflator (an adjustment for inflation) rose by 6.0% year-on-year in the quarter, “primarily reflecting the 7.3% increase in the price of household consumption expenditure”.

That is the fastest annual household deflator growth rate since 1991, the ONS said.

A picture of residents and guests having plenty of fun at the Cookham Jubilee Street Party on 5 June in Berkshire – but those parties had an effect on economic activity.
Residents and guests were having plenty of fun at the Cookham Jubilee Street Party on 5 June in Berkshire – but those parties had an effect on economic activity. Photograph: Maureen McLean/REX/Shutterstock

UK GDP fell by 0.6% in June, but it isn’t quite as bad as it sounds.

Two things we need to take into account: the Queen’s Platinum Jubilee and the move of the May bank holiday led to an additional working day in May 2022 and two fewer working days in June 2022.

The ONS cautions that although this impacted on monthly GDP, there was little impact on the quarterly estimates.

UK GDP fell 0.1% in second quarter

Good morning, and welcome to our live, rolling coverage of business, economics and financial markets.

UK gross domestic product (GDP) is estimated to have fallen by 0.1% in the second quarter from April to June 2022, according to the Office for National Statistics (ONS).

The UK economy grew by 0.8% in the previous quarter, according to the ONS. However, economists had expected the economy to falter in the second quarter, with a poll this week predicting a 0.2% decline in UK GDP in the period from April to June.

The Bank of England has already predicted the UK will enter a long recession from the final three months of this year, with the economy only growing again in the first quarter of 2024.

A big reason for that expected recession is inflation and the Bank’s response to it. The Bank’s rate-setting monetary policy committee already voted last week for the biggest rate increase in 27 years in order to try to slow the pace of price increases.

Energy price rises are at the heart of the economic issues facing the UK and many other economies around the world. Annual average household energy bills are forecast to top £4,200 from January and £4,400 from April, according to forecasts from Cornwall Insights, a consultancy.

The state of the economy and the cost of living crisis are almost certain to be the top priority for the new prime minister, either Liz Truss or Rishi Sunak, once the Conservative party leadership race is decided by 5 September.

Current Prime Minister Boris Johnson has repeatedly said he will not take action on economic policy in his last few weeks as a lame duck leader, so as not to bind the hands of his successor. Johnson reiterated the message on Thursday in a meeting with energy company bosses, some of whose businesses have reported booming profits thanks in part to the invasion of Ukraine by Russia, which has raised concerns about global supplies.

However, opposition politicians, union leaders and campaigners have all urged the government to speak to the two leadership contenders’ teams about emergency actions to prepare for what is expected to be a very difficult winter for households.

The agenda

  • 10am BST: Eurozone industrial production (July; previous: 0.5% month-on-month growth; consensus: 0.2%)

  • 1pm BST: UK Niesr monthly GDP tracker (July; previous 0.2%)