Economy shrinks – with Jubilee partly to blame

The UK’s economy contracted by 0.1% in the second quarter, according to latest estimates.

In June, GDP fell by 0.6%, services fell by 0.5%, manufacturing by 1.6% and construction by 1.4%, the Office for National Statistics said.

The large drop in June was partly caused by the large reduction in services spending as coronavirus test and trace initiatives were phased out, and partly because the Platinum Jubilee meant that there were two fewer working days that month.

Nevertheless, the UK’s economic performance was worse in the second quarter than that of nations like Canada, Italy, France, and Germany, with underlying data showing that economic pressures were beginning to take hold on consumer spending.

Private consumption fell by 0.2% in the second quarter – an indication that record high prices for food and other goods was stopping people from spending.

But it is too soon to say that the UK is in a recession, according to KPMG.

“It is too early to call a recession despite output fall” said Yael Selfin, Chief Economist at KPMG UK.

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“Households are already bruised by rising inflation, which is putting a squeeze on real incomes, while rising interest rates are making servicing mortgages less affordable,” they said.

“The expected rise in Ofgem’s utility tariff cap this autumn could be the final straw before the UK enters a consumer-driven downturn.”

It comes after a 0.4% increase in GDP in May and dire forecasts from the Bank of England of a 15-month recession – five consecutive quarters of economic contraction.

Speaking after the Bank hiked interest rates by 50 basis points (0.5%) this month in an attempt to deal with the highest rate of inflation in more than 40 years, Governor Andrew Bailey said GDP would probably fall to 1.25% in 2023 and 0.25% in 2024.

If this forecast is borne out, it would be the first instance of two years of annual economic contraction since the 1960s.

People are also facing massive rises in energy bills, with consultancy Cornwall Insight predicting that the price cap is expected to reach about £3,582 a year for the average household from October.

This is an increase from the £3,359 predicted earlier this month, and compares to the price cap last October of £1,277.

From January, the amount is expected to hit £4,266 before continuing to rise in April to £4,427 – the previous forecast was for £3,729 in April.

Millions of homes are already in debt over their energy bills – with £1.3bn owed, even before bills are set to soar by more than 80%, according to analysts at Uswitch.

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