The UK economy contracted in the second quarter, with households cutting back on spending as the cost-of-living crisis began to bite and output from the healthcare sector fell as they Covid cases and tests.
Gross domestic product, the measure of the amount of goods and services produced, fell 0.1% in the second quarter of the year after rising 0.7% in the previous quarter.
A temporary recovery is expected in the third quarter before the UK slips into recession over the winter as further energy price rises squeeze household incomes and hit spending.
The fall was sharper at the end of the quarter, with GDP falling 0.6% in June, but that drop reflected two days of work lost from the Queen’s Platinum Jubilee. The Office for National Statistics, however, said the celebrations had “little impact on quarterly estimates” and that the fall in GDP reflected the halt in economic growth.
Overall, Friday’s figures are close to those expected by economists and the Bank of England.
Darren Morgan, head of economic statistics at the ONS, said the economy “slightly contracted” in the quarter with weak health and retail sales partially offset by “growth in hotels, bars, hair salons and outdoor events throughout the term.”
Yael Selfin, UK chief economist at KPMG, said the end of the coronavirus test-and-trace program was significant in the drop in output in the second quarter, and while it was temporary, you could see weakness in the whole economy.
“Households are already being hit by rising inflation, which is putting pressure on real incomes, while rising interest rates are making servicing mortgages less affordable. The expected increase in the rate cap d “Ofgem this autumn could be the last straw before the UK goes into a consumer-driven recession,” he said.
The UK economy performed better than the US in the second quarter, but worse than the other G7 economies of Germany, France, Italy and Canada, which saw a bigger rebound from the pandemic.
Nadhim Zahawi, the chancellor, said: “I know times are tough and people will be worried about rising prices and slowing growth, so I am determined to work with the Bank of England to control the inflation and grow the economy.”.
Some economists were more gloomy and thought that the drop in GDP already marked the beginning of a recession. Stephen Millard, deputy director of the National Institute for Economic and Social Research, said: “It now looks like the UK economy has gone into recession. [because] We expect production to continue to decline over the next three quarters.”
Details of the second-quarter figures showed households were already feeling the pinch, with consumption down 0.2%, offset by some good news from business investment, which rose 3.8%. Business investment has been spotty in recent quarters and was still 6% below pre-pandemic levels.
Trade performance was once again poor with another record trade deficit, excluding precious metals. Exports were £27.9 billion less than imports by this measure, a gap of 4.5 per cent of national income, the largest since comparable records began in 1997.
Much of this shortfall reflects expensive oil and gas imports, but there have also been notable increases in vehicle and machinery imports from the EU without corresponding increases in exports.
At the sectoral level, the main decline in output in the second quarter occurred in services, particularly in the health sector and retail trade, offset by improvements in services related to the booming tourism sector. Manufacturing shrank slightly, as did the North Sea oil and gas sector despite record prices.
Figures show the UK economy was 0.6 per cent bigger than in the quarter immediately before the pandemic, but significantly smaller than expected, suggesting lasting damage to economic performance.