The UK economy shrank at the quickest pace in seven months as wet weather held back spending and strikes hit the public sector, unwinding the strength of the previous month.
Gross domestic product slipped by 0.5% following a 0.5% gain in June, the Office for National Statistics said Wednesday. Economists had expected a contraction of 0.2%.
The figures add to evidence the UK economy is losing momentum in the face of a sharp increase in borrowing costs. It may give some Bank of England policymakers pause for thought when they decide later this month whether to raise interest rates again in their fight to tame inflation.
“Higher interest rates and sticky inflation are having a more significant effect on the economy,” said Neil Birrell, chief investment officer at Premier Miton. “All eyes will be on the Bank for the announcement of the rate decision.”
That’s bad news for Prime Minister Rishi Sunak, who faces the prospect of a general election next year with his Conservative Party lagging far behind the Labour opposition in opinion polls. Chancellor of the Exchequer Jeremy Hunt said the UK is doing well compared to other countries.
“There are many reasons to be confident about the future. We were among the fastest in the G-7 to recover from the pandemic, and the IMF have said we will grow faster than Germany, France, and Italy in the long term,” Hunt said.
The pound fell after the report, trading at $1.2458. Money markets are pricing in quarter-point rise to 5.5% with the possibility of a further increase by year end. However, BOE Governor Andrew Bailey has signaled the most aggressive hiking cycle since the 1980s is almost complete.
The main cause of the contraction was the dominant services sector, which fell 0.5% in July. Cool and rainy weather depressing retail sales during the month. Output was also dented as doctors, teachers and rail staff walked off the job in their disputes with the government over pay.
“The broader picture looks more positive, with the economy growing across the services, production and construction sectors in the last three months,” said Darren Morgan, director of economic statistics at the ONS.
Activity in the information and communication sector also fell in July, particularly in computer programming and consultancy, after three consecutive months of growth. The ONS said strikes held back recruitment, especially in the NHS. Wet weather hurt retail sales, construction and outdoor venues.
Offsetting the falls in health, consulting and retail was a big increase in recreational experiences as people went out. The arts, recreation and entertainment sector grew by 6.6% — the best growth since May 2021. Within that, sports, amusement and recreation activities grew by 12.4% while creative, arts and entertainment grew by 4.9%.
There were also declines across other sectors including construction and industrial production.
Manufacturing activity was the biggest downwards contributor to production, following strong growth a month earlier. Manufacture of rubber and plastics products and other non-metallic mineral products was the largest contributor to the fall, followed by computer, electronic and optical products.
In construction, households cut back on repair and maintenance, in a sign that inflation is eating into incomes. The sector shrank 0.5% as a whole, largely due to a fall in demand among private housing. There was also a slowdown in the housebuilding sector. The ONS said the unusually cold and wet July weather may have been to blame.
Data on Tuesday showed the labor market, closely watched by the BOE for signs of persistent inflation, is cooling down.
The latest GDP estimate may well be revised later this month when the ONS will release new estimates consistent with its “Blue Book” changes.
Those changes re-wrote the narrative of the pandemic, with the economy larger than previously thought at the end of the 2021 and above pre-Covid levels. However, they provided no guide to how the economy has fared since then, a period of rising inflation and interest rates.
A slide in output for July had largely been penciled in and may do little to alter expectations that the economy will eke out modest growth in the third quarter as a whole. The longer-term outlook is for stagnation, with Bloomberg Economics even predicting a shallow recession starting later this year as households struggle with the sharp rise in debt costs.
(Updates with details from the report.)