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UK GDP falls by 0.1% in 2Q22 as recession fears loom


We thought we would finish off the week with some good news, UK GDP fell by 0.6% in June – which is better than consensus estimates of -1.2%, and puts the national economy in a better position than when it was in full-blown lockdown.

Unfortunately, that’s about all the positive spin we can give the latest data to emerge from the Office for National Statistics.

The government agency reported that for the second quarter of 2022 GDP was estimated to have fallen by 0.1% after 0.8% growth the previous quarter. Again, on the bright side, the figures were better than expected, as economists were forecasting a 0.2% contraction in 2Q22.

The Bank of England had previously predicted that the UK would enter a deep recession in the last quarter of the year, predicting that the country would be in recessionary territory until at least the first quarter of 2024.

One accelerant for recession has been the Bank of England pushing interest rates up to the highest level in 27 years, which has had a detrimental effect on borrowing and spending in the greater economy. Less spending means companies are making less revenue, and they either have to borrow money at increased rates, raise prices, or let staff go.

However, the decision to raise rates has been largely taken out of the Bank of England’s hands, as inflation and the sudden spike in energy prices, driven by conflict in Ukraine and a recent closure of oil wells in the Gulf of Mexico, are not just a UK-thing, but a global phenomenon.

Jonathan Moyes, head of investment research, The Wealth Club said: “The current inflationary spike is being driven overwhelmingly by global food and energy prices which, by and large, are outside of the Bank of England’s control.”

Inflation hit a 40-year high of 9.4% in July and is expected to continue rising through to autumn.

Strangling the life out of the economy

He continued: “Higher interest rates in the UK will do little to alleviate those pressures. By looking to stave off any knock-on inflationary pressures, such as higher wages, the Bank risks strangling the life out of the economy without significantly easing the cost-of-living crisis.”

Political inertia is exasperating the situation – as the UK Conservative Party goes through it’s long-drawn-out leadership selection exercise. Sitting Prime Minister Boris Johnson has said that he will not act to ease the cost of living crisis, as he did not want to bind the hands of his successor, either Rishi Sunak or Liz Truss, when they assume the mantle of the premiership in Autumn. The sound of a violin playing in a lonely bedroom at Number 10 Downing Street can still just be heard over the sirens of fire engines.

Another heartening fact is that ‘we are all in this together,’ to borrow a phrase from one of Johnson’s predecessors, as retraction can be seen across the board in all industrial sectors.

“All sectors fell in the month with the manufacturing sector falling 1.6% although it was flat over the quarter despite inflationary pressures. The service sector is the largest in the UK economy and it fell by 0.4% in the quarter,” said Toby Sturgeon, global head of fiduciary investment services at Zedra.

He continued: ““There were also some upward revisions in previous numbers which is encouraging but this is still the worst monthly drop since January 2021 when the country was in full lockdown. The economy shrank by 0.1% in Q2, the first quarterly drop since the start of the pandemic.”

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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