Output falls

Strikes and rain hit GDP amid new recession fears

Jeremy Hunt
Jeremy Hunt: reasons to be confident

Strikes and ‘exceptionally wet weather’ have been blamed for a 0.5% fall in UK GDP in July which raises the prospect of recession.

The setback followed growth of 0.5% in June, according to official data from the Office for National Statistics.

The ONS makes clear that GDP increased by 0.2% in the three months to July 2023, with growth in all three main sectors.

Chancellor Jeremy Hunt said: “Only by halving inflation can we deliver the sustainable growth and pay rises that the country needs.

“But 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 have said we will grow faster than Germany, France, and Italy in the long term.”

Jeremy Batstone-Carr, European strategist at Raymond James, was less convinced and said said the fall “provides further evidence that the UK economy’s resilience is starting to wane and suggests a shallow recession is increasingly likely over the remainder of the year.”

He added: “All sectors of the economy have started the third quarter under pressure, with the service and retail sectors particularly hard hit due to an unusually wet July.

“On top of this, the lagged impact of earlier interest rate hikes are being felt throughout the economy. If banks continue to curtail credit and withdraw lending, the economy will fail to gain any real traction. The Bank of England should be careful of further rate hikes with this in mind.

“The labour market is of even more pressing concern to the Bank of England. Wage growth in the three months from May to July rose 8.5% year-on-year, above all forecasts, which potentially locks in a big increase in public pensions next April.

“Pronounced wage pressures, added to contracting activity, leave little room for error amongst interest rate-setters. The Bank of England must tread a very fine line to lower inflation without deepening the incoming recession through overzealous rate hikes.”

Ben Jones, CBI Lead Economist, said: “Varied performance across sectors in July makes it difficult to separate the signal from the background noise. Manufacturing and construction output has been volatile recently and strikes continue to weigh on parts of the service sector. Consumer spending is similarly mixed – July was a washout for the retail sector, but a bumper month at the box office.

“While rising wages and lower energy prices should aid households and help keep recession at bay, the loss of economic momentum through Q3 now being reported by firms could keep the economy stuck in a low gear.

“With encouraging investment key to delivering growth, the Autumn Budget provides a vital opportunity to shore up business confidence. CBI analysis shows that a permanent full expensing regime could boost GDP by 2% by 2030/31 – with benefits felt across the whole economy.”

Retail sales

The total value of Scottish retail sales sagged in real terms in August, declining for a second successive month.

Both food and non-food saw a weaker performance, with the hoped for back-to-school bounce failing to materialise and the soggy weather coupled with households’ tighter husbandry of finances impairing sales of clothing and groceries.

David Lonsdale, director of the Scottish Retail Consortium, said: “Its been a somewhat unnerving start to the second half of the calendar year with retail sales growth yielding to the cost-of-living crunch.

“Inflation levels are easing however it remains to be seen if elevated mortgage rates and talk of tax rises ultimately leave household incomes and pay packets lighter, impacting sentiment and spending.

“Policy makers should be wary about adding any further pressure onto household finances over the months ahead.”

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