Home Business NewsBusiness Economy contracts as UK struggles under ‘chokehold of sky-high inflation’

Economy contracts as UK struggles under ‘chokehold of sky-high inflation’

by LLB Reporter
12th Aug 22 11:26 am

UK GDP fell 0.1% in the second quarter of the year, official figures out today showed.

Extra Jubilee bank holiday a factor in June’s 0.6% fall, the numbers showed.

Winding up of covid measures were also key factor in 0.4% fall in services sector between April and June

Danni Hewson AJ Bell financial analyst comments on second quarter GDP figures: “It is too early to start shouting ‘recession’ but the 0.1% contraction in the economy between April and June is adding to concerns that it’s most certainly round the corner. Another three months will tell the tale, and as many households are already cutting back on both discretionary spend and everyday essentials, while businesses struggle under the chokehold of sky-high inflation, the mood music is sombre.

“June’s 0.6% fall had been expected, although the joy of the Jubilee bank holiday was a double-edged sword for the economy. Whilst bars and restaurants, hotels and festivals provided a welcome distraction from the day to day, it also meant two days when offices were closed, factories idled and building sites fell silent.

“But that doesn’t tell the full story. Manufacturing and construction both fell significantly in June as higher energy prices and increased costs of materials had businesses taking a long look at their margins. And whilst a surge in GP visits helped offset the fall in covid measures in May, it couldn’t do the same for June’s numbers. Track and Trace, lateral flow testing and booster vaccines have gradually been petering out. And the surge in bookings seen at travel agents also couldn’t be sustained; this year’s summer holiday could only be booked once and the pressure on budgets is unlikely to leave any wiggle room for many bonus breaks.

“May’s surprisingly robust growth number has been revised down from 0.5% to 0.4% and this was a month which enjoyed an extra ‘productive’ day as the normal Whitsun bank holiday was shifted into June.

“Looking at the second quarter as a whole there are obvious signs that high prices are dampening consumer spending power, with a 0.2% fall in real household consumption. The question is, how will the underlying weakness in the economy manifest once all the temporary factors are taken away?

“Will costs for items like asphalt, concrete and bricks prove surmountable for the construction industry? Despite a dip in June the sector grew over the quarter and is 2.7% up on where it was before the pandemic. Demand for housing stock is still high despite recent rate rises and though average house prices are expected to fall back on recent highs, housebuilders say their forward orders remain robust. Then there’s the big switch to greener energy and other infrastructure projects which could keep the sector buoyant even as the economy contracts. Certainly, business investment over the last quarter is up which is massively important for growth.

“But retail is struggling and consumer facing services as a whole are still 4.9% down on where they were before lockdowns were a thing. A summer of rescheduled celebrations might have sent people scurrying back to hairdressers and beauty salons. But those one-off visits can’t make up for the regular touch-ups that have become less frequent since people got used to having to do it themselves. If money is tight those DIY beauty tactics will most certainly be pressed back into service.”

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