UK recession looms after economy shrank 0.1% in three months to June

The UK economy contracted by 0.1 per cent between April and June, driven by a decline in spending by households and on fighting coronavirus, compared to growth of 0.8 per cent in the previous three months, the Office for National Statistics has said.

It was the first fall back since the pandemic, in part reflecting time off for Queen Elizabeth II's platinum jubilee celebrations, stoking fears that a recession might be around the corner. The figure for June showed a 0.6 per cent decline because of the extra holiday at the start of the month, which followed surprise growth in May due to the celebrations. The state of the economy, and how to tackle the cost-of-living crisis in particular, has been the main focus of the race to become the next UK prime minister. With energy bills rising steeply, on top of increasing food and fuel prices, Rishi Sunak and Liz Truss have both been setting out plans for tax cuts or extra help for consumers.

Commenting on the gross domestic product (GDP) figures, ONS director of economic statistics Darren Morgan said: “With May’s growth revised down a little and June showing a notable fall, overall the economy shrank slightly in the second quarter.

“Health was the biggest reason the economy contracted as both the test and trace and vaccine programmes were wound down, while many retailers also had a tough quarter. “These were partially offset by growth in hotels, bars, hairdressers and outdoor events across the quarter, partly as a result of people celebrating the platinum jubilee.”

While the economy is expected to stage a technical rebound in the current quarter as the effect of the holiday unwinds, the outlook beyond that is bleak.

With inflation rising and energy prices on course for another eye-watering jump in October, the Bank of England expects the UK to enter a recession at the end of this year and register no growth until the latter half of 2024.

The quarterly reading was a notch stronger than the 0.2 per cent contraction expected by economists and the BoE. It is unlikely to shift the central bank away from further interest rate increases. Officials have already raised the key rate to 1.75 per cent, from 0.1 per cent in December, and markets are close to pricing in another half-point rise in September.

On Wednesday, BoE chief economist Huw Pill acknowledged that raising interest rates to fight inflation would slow growth but argued that it was necessary to stabilise the economy over the long term. “While we see increasing signs of underlying weakness in the economy, we expect a more severe downturn to take place only from towards the end of this year,” said Yael Selfin, chief economist at KPMG UK.

The downturn is likely to start in autumn after Ofgem hikes the price cap on energy bills in October by an estimated 84 per cent to £3,634, according to the latest predictions.

The Bank of England has predicted that the economy will shrink in the final quarter of this year and then every quarter in 2023.

Chancellor of the Exchequer Nadhim Zahawi 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 is why I am 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 [$1,465] for eight million of the most vulnerable households.”

Alice Haine, personal finance analyst at investment platform Bestinvest, said: “A GDP contraction in the second quarter was always on the cards as the economy — battered by the cost-of-living crisis and the wider global challenges posed by the war in Ukraine — heads towards a recession at the end of the year. “While a decline of 0.6 per cent in June was lower than expected, it was exacerbated by May’s surprise expansion of 0.4 per cent on the back of the celebrations around the extra Jubilee bank holiday.

“While the withdrawal of the NHS Test and Trace Covid-19 vaccination services was one of the main drivers behind the contraction, the hit to household finances from runaway inflation — as energy and food prices spiralled upwards and fuel also hit record highs in the April to June period — must be factored in too.

“There was a 0.2 per cent decrease in real household consumption in the second quarter as many households slashed budgets and dramatically reduced expenditure to ensure their finances hold up not only this summer but also through the long winter months when energy prices are expected to soar even higher.”