The UK economy is slowing for the first time since Covid lockdowns

The UK economy contracted in the second quarter for the first time since the pandemic, on the back of a slowdown in household spending and a fight against the coronavirus.

Gross domestic product fell 0.1 percent after rising 0.8 percent in the first quarter, the Bureau for National Statistics said on Friday. A drop in Covid testing and vaccinations, along with slower retail sales and the first drop in household consumption in more than a year, were the biggest drivers. The manufacturing sector also declined.

The results mark the biggest bump yet in the recovery from the pandemic. The Bank of England expects inflation at a 40-year high to plunge the economy into recession later this year.

“The UK economy is moving in an alarming direction,” said David Bharier, BCC’s research director. “While some consumer-facing industries have benefited from further lifting of Covid travel restrictions, the retail sector declined 1% for the quarter, reflecting unprecedented pressures from inflation and global supply chain disruptions.”

While the prospects are for a recovery in the current quarter as the impact of the holiday season fades, policymakers are concerned about what lies ahead. Rising inflation and rising energy bills pose a difficult task for the winner of the race to succeed Boris Johnson as Prime Minister.

“The economy has entered a difficult period on weak foundations,” said James Smith, director of research at the Resolution Foundation. “The outlook is bleak. The first priority for the incoming Prime Minister will be further targeted support for low- and middle-income households, who will be hit hardest by the stagflation that already appears to be taking hold.”

The June figure alone showed a 0.6% drop, mainly due to an additional holiday to mark the Queen’s Jubilee. That was half of the expected drop, but May’s figure was also revised down.

“Health was the main reason for the slowdown in the economy as both testing and tracing and vaccination programs were halted while many retailers also had a difficult quarter,” Darren Morgan, director of economic statistics at the ONS, said on Friday. “These were partially offset by growth in hotels, bars, hairdressers and outdoor events.”

The quarterly read was a notch stronger than the 0.2 percent contraction expected by both economists at the BOE. The central bank is unlikely to be dissuaded from further rate hikes to control inflation.

Officials have already raised interest rates to 1.75 percent from 0.1 percent in December, and markets are close to pricing in another half-point hike in September. Following the data, bets on the pace of BOE tightening edged up slightly and traders are now pricing in another 150 basis points of hikes through May 2023.

On Wednesday, Bank of England chief economist Huw Pill acknowledged that raising interest rates to fight inflation will slow growth but argued it was necessary to stabilize the economy over the long term.

“I know times are tough and people will be concerned about rising prices and slowing growth, so I am committed to working with the Bank of England to get inflation under control and stimulate the economy,” said Chancellor of the Exchequer Nadhim Zahawi. The UK economy is slowing for the first time since Covid lockdowns

Fry Electronics Team

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