Economy shrinks by 0.5% in UK

According to official estimates, there was a 0.5% shrinks in the GDP of the United Kingdom in July. This was due to industrial action as well as exceptionally wet weather. This has increased concerns about a possible recession in the second half of the year.

The Office for National Statistics stated that strikes by junior physicians affected health sector activity. Additionally, the Office for National Statistics stated that retailers who had profited from a warm June suffered in July, which was the sixth wettest month on record. Analysts had predicted that the gross domestic product (GDP) would fall back by 0.2%.

However, the drops in output went beyond those sectors that were affected by strikes and weather, with all three major sectors – manufacturing, services, and construction – shrinking for the first time since the summer of last year. This was the first time any of these sectors had contracted since the beginning of the year.

Analysts working for the consultancy Capital Economics expressed concern that a recession may already be underway in the UK. According to Paul Dales, the chief UK economist, the decrease in July would mean the Bank of England’s forecast of 0.4% growth in the third quarter of the year was unlikely to be realized. This projection was made based on the previous two quarters.

However, he predicted that robust wage growth and persistent core inflation would result in officials at the Bank of England raising the base interest rate from its current level of 5.25% when they meet on September 21. The financial markets anticipate that the rate-setters will raise that number by 0.25 percentage points to 5.5%.

The labor market was shown to be faltering when figures were revealed on Tuesday showing an increase in unemployment and a decline in the number of openings; however, average wage hikes, excluding bonuses, were higher than the inflation rate of 6.8%, coming in at 7.8%.

Rachel Reeves, who holds the position of shadow chancellor, referred to the most recent GDP data as “dismal” and stated that they demonstrated that “the British economy remains hostage to the Conservatives’ low growth trap that is leaving working people worse off.”

The Treasury Department stated that it anticipated that the strikes, which also hurt the education sector, and the adverse weather will each play a part in contributing to the slowdown of the economy; but, it added that there were reasons for optimism.

The current chancellor, Jeremy Hunt, made the following statement: “We can only deliver the sustainable growth and pay rises that the country needs if we cut inflation in half.”

“However, there are a great number of grounds to have optimism over the years to come. We were among the fastest in the G7 to recover from the pandemic, and the International Monetary Fund has predicted that over the long run, our economy will develop more quickly than that of Germany, France, and Italy.

Business organizations reported that their members were making preparations for a challenging fall and winter as a result of rising interest rates and a decrease in consumer demand.

According to the Institute of Directors, the decline in demand for computer and information technology services is a portent of impending reductions in business investment made by corporations who are concerned about the possibility of a recession.

After three consecutive months of growth in April, May, and June, computer programming, consultancy, and other activities related to computers had a 3.4% decrease in July.

Both the manufacturing and construction industries saw declines in July, with both falling by 0.8% and 0.5% respectively, which helped partially erase June’s 1.6% growth. After posting growth of 0.2% in June, the output of services, which accounts for approximately three-quarters of the activity in the private sector, decreased by 0.5% in July.

“This fall in GDP will come as little surprise for small businesses,” said Martin McTague, national chair of Federation of Small Businesses. “Small businesses have endured uncertain trading conditions over the course of a summer that was marked by poor weather and still-high levels of inflation,” McTague added.

“It is disheartening to see a fall in the three main sectors of services, construction, and production,” said the author, “with the fall in services especially eye-catching due to the dominance of the service sector in the UK economy.”

Following a decline of 0.1% in May 2023 and growth of 0.2% in April 2023, it was anticipated that GDP increased by 0.5% in the month of June 2023.

It was anticipated earlier this month that GDP growth in 2020 and 2021 would be revised upward, which meant that GDP was estimated to be 0.6% over pre-coronavirus pandemic levels in the last three months of 2021. Previously, it had been estimated that GDP would be 1.2% below those levels.

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