The UK economy is expected to have contracted modestly in July, as weak retail activity and higher household energy costs weighed on consumer spending at the start of the third quarter.
Economists at Investec and Pantheon Macroeconomics forecast that official figures due to be published by the Office for National Statistics on September 11 will show gross domestic product falling by 0.1 per cent during the month.
Such a decline would represent a weaker start to the third quarter following stronger-than-expected growth earlier in the year and would provide an early economic challenge for Andy Burnham, who became prime minister during July.
The economy expanded by 0.3 per cent in June, supported by strong activity in hospitality and leisure as prolonged warm weather and football tournaments encouraged consumer spending.
That helped lift growth across the second quarter to 0.4 per cent.
Economists, however, expect some of that momentum to unwind. Stronger activity in June may have brought forward spending that would otherwise have taken place in July, while pressure on household finances appears to have re-emerged.
Analysts at Investec said: “After a positive first half of the year, where the UK economy actually outperformed the rest of the G7, growing by 1%, we expect the third quarter will begin with a weaker performance.
Some evidence of this has already been seen in soft retail sales for the month, whilst we expect the rise in household utility bills due to the 13% uplift to the energy price cap would have had a dampening effect.
The expected contraction would underline the fragility of Britain’s economic recovery, particularly given the extent to which growth in recent months has depended on consumer-facing sectors.
Robert Wood, an economist at Pantheon Macroeconomics, also expects GDP to fall by 0.1 per cent in July.
He forecasts that growth will slow to 0.2 per cent across the third quarter as a whole, suggesting that the economy is likely to lose momentum after a relatively robust first half.
Wood said weakness was likely to have been spread across broad areas of the services sector, which accounts for the majority of British economic output.
Retail and wholesale output is expected to have fallen by 0.3 per cent during July. That weakness could be partly offset by stronger activity in hotels, restaurants and other hospitality businesses.
Forecasters expect “a surge in accommodation and food services output in July” as hot weather and enthusiasm surrounding England’s World Cup campaign supported spending in pubs, restaurants and hotels.
The contrasting fortunes of different consumer-facing sectors suggest households may have shifted their spending rather than increased it overall.
Thomas Pugh, chief economist at RSM UK, said: “Services are likely to have been a tale of two consumers.
England’s World Cup run should have delivered a strong month for pubs, restaurants and hotels, but a 0.5% fall in retail sales suggests households changed where they spent, rather than opening their wallets wider, spending more money over the bar, but less at the tills.
The July figures will be closely watched for signs of whether the economy can sustain the pace of expansion seen during the first half of the year.
Growth of 1 per cent in the first six months put the UK ahead of other G7 economies, according to Investec, but a slowdown would reinforce concerns that higher household bills and persistent pressure on consumer finances are limiting the durability of the recovery.
For the new government, a weaker GDP reading would also sharpen the political challenge of maintaining growth while addressing the cost-of-living pressures facing households.
With the Budget approaching and public finances under scrutiny, the July figures could provide an early indication of the economic environment confronting the Burnham administration as it seeks to balance its growth ambitions against renewed pressure on household spending.
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