UK economy contracts by larger-than-expected 0.5% in July

UK economic output contracted by a larger-than-expected 0.5 per cent in July, figures from Britain’s Office for National Statistics (ONS) showed on Wednesday, marking the biggest drop this year.

A Reuters poll of economists had pointed to a contraction in gross domestic product (GDP) of 0.2 per cent from June.

All major sectors of the economy – services, manufacturing and construction – declined in July, the data showed.

Wednesday’s data do not include recent, substantial upward revisions to the performance of Britain’s economy up to the end of 2021.

However, the figures add to evidence the UK economy is losing momentum in the face of a sharp increase in borrowing costs. It may give some Bank of England policymakers pause for thought when they decide later this month whether to raise interest rates again in their fight to tame inflation.

“Higher interest rates and sticky inflation are having a more significant effect on the economy,” said Neil Birrell, chief investment officer at Premier Miton. “All eyes will be on the Bank for the announcement of the rate decision.”

That is bad news for Prime Minister Rishi Sunak, who faces the prospect of a general election next year with his Conservative Party lagging far behind the Labour opposition in opinion polls. Chancellor of the Exchequer Jeremy Hunt said the UK is doing well compared to other countries.

“There are many reasons to be confident about the future. We were among the fastest in the G-7 to recover from the pandemic, and the IMF have said we will grow faster than Germany, France, and Italy in the long term,” Hunt said.

The main cause of the contraction was the dominant services sector, which fell 0.5 per cent in July. Cool and rainy weather depressing retail sales during the month.

Output was also dented as doctors, teachers and rail staff walked off the job in their disputes with the government over pay.

“The broader picture looks more positive, with the economy growing across the services, production and construction sectors in the last three months,” said Darren Morgan, director of economic statistics at the ONS.

Activity in the information and communication sector also fell in July, particularly in computer programming and consultancy, after three consecutive months of growth. The ONS said strikes held back recruitment, especially in the NHS. Wet weather hurt retail sales, construction and outdoor venues.

The latest GDP estimate may well be revised later this month when the ONS will release new estimates. – Bloomberg, Reuters

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