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UK economy contracts by surprise 0.5% in July

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The UK economy contracted much faster than expected in July, weakened by industrial action, wet weather and higher borrowing costs, official figures showed.

Gross domestic product fell 0.5 per cent, a reversal from an increase of 0.5 per cent in June, according to the Office for National Statistics (ONS). City analysts thought GDP would fall 0.2 per cent.

Shrinking output was driven by a downturn in the services and industrial sectors, with GDP declining 0.5 per cent and 0.7 per cent respectively. Retail and construction activity was also poor.

“Industrial action by healthcare workers and teachers negatively impacted services, and it was a weaker month for construction and retail due to the poor weather, “ Darren Morgan, ONS director of economic statistics, said.

“Manufacturing also fell back following its rebound from the effect of May’s extra bank holiday. A busy schedule of sporting events and increased theme park visits provided a slight boost.”

However, he said that “the broader picture looks more positive” with GDP up 0.2 per cent in the three months to July as all three main sectors — services, production and construction — expanded.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “We doubt that July’s month-to-month drop in GDP marks the start of a falling trend, given that it can be uncontroversially attributed to one-off developments.

“For a start, sharp falls in output in the health and education sector, which collectively subtracted 0.24 percentage points from month-to-month growth in GDP, were the result of strikes. Teachers were on strike for two days in July, after working all normal days in June, while junior doctors increased the number of days of industrial action to five, from three in June.”

Jeremy Hunt, the chancellor, said: “There are many reasons to be confident about the future. We were among the fastest in the G7 to recover from the pandemic and the IMF [International Monetary Fund] has said we will grow faster than Germany, France and Italy in the long term.”

A mounting body of evidence suggests the dampening effects of the Bank of England’s 14 successive interest rate rises on the economy are being felt. Interest rate changes typically take several months to feed through the economy.

Other data, such as the purchasing managers’ indexes, indicate that UK economic activity was brittle in August too. Numbers yesterday showed unemployment crept higher to 4.3 per cent and employment fell.

So far this year Britain has dodged a widely forecast recession, defined as two quarters of negative growth. Earlier this month the ONS, in a historical upgrade to its GDP estimates, said the economy returned to its pre-pandemic size two years ago, meaning output is 1.5 per cent greater now than before the Covid-19 crisis. It was previously thought to be smaller.

The Bank of England’s rate-setting monetary policy committee (MPC) has lifted the UK’s base rate from a record low of 0.1 per cent in December 2021 to a 15-year high of 5.25 per cent. The policy is designed to make it more attractive to save and more expensive to borrow, which should, in theory, curb spending and bring down inflation.

Living costs are rising more slowly, with consumer price index inflation down to 6.8 per cent from a high of 11.1 per cent. Price growth is tipped to cool for the rest of the year.

Reversing economic growth ease the pressure on Andrew Bailey, the Bank governor, and the rest of the MPC to vote for another interest rate increase next week. The nine-strong group are concerned they may spark a recession by tightening policy beyond what is necessary to drag inflation back down to the 2 per cent target.

Financial markets think the Bank will deliver a final 0.25 percentage point jump next week, mainly to combat record wage growth of more than 8 per cent. Rate cuts are not forecast until the end of next year.

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