UK Economy Shrinks More Than Expected in July
British PM Sunak

UK Economy Shrinks More Than Expected in July

UK: Britain’s economic output has shrunk by a larger-than-expected 0.5 per cent in July after a growth of 0.5 per cent in June, the Office for National Statistics (ONS) said on Wednesday.

Output of all three main sectors dropped in July, the ONS said, adding that services and construction sectors fell by 0.5 per cent, and production went down by 0.7 per cent.

According to the ONS, the decline in services output contributed significantly to the falloff output in UK GDP in July.

“In July, 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. Manufacturing also fell back following its rebound from the effect of May’s extra Bank Holiday.

“However, 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.

The ONS data showed that Britain’s GDP increased by 0.2 per cent in the three months to July, with growth in all three main sectors.

“Remember that output had increased by the same percentage in June, thanks in no small part to a highly unusual surge in manufacturing. That boost to production, which was linked to car production and pharmaceuticals, partially unwound in July.

“But the hit from there was amplified by the service sector, which saw output fall by 0.5%. Strikes offer part of the explanation, with losses most visible in health. But we also saw declines in a range of other sectors, including IT and admin/support services, and this is harder to explain”, ING James Smith Developed Markets Economist said in a note.

Cutting through the noise, the economy seems to be still growing, albeit fractionally.

“The change in activity over the past three months relative to the three months before is still slightly positive. We think the economy is likely to more or less flat line over coming quarters – and a mild recession can’t be ruled out”, James said.

The jobs market is cooling, while the impact of higher rates is still yet to hit the economy. The average rate paid on outstanding mortgages is roughly 3%, up from a low of 2% but well below the 6%+ rates being quoted on two-year mortgages for new lending.

“As more and more borrowers refinance, we expect the average mortgage rate to rise above 4% in 2024, even without any further Bank of England rate hikes. That’s a gradual process so we don’t expect an abrupt hit to GDP in any specific quarter, but it will act as an ever-increasing drag on consumer spending”, James stated in the commentary note.

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