Shoppers walk in the rain on Oxford Street in London.
Tolga Akmen/AFP/Getty Images
The UK economy contracted in the second quarter of 2022 as the country’s cost of living crisis hit home.
Official data released on Friday showed gross domestic product (GDP) shrank 0.1 percent on a quarterly basis in the second three months of the year, less than the 0.3 percent contraction expected by analysts.
This comes after GDP grew by 0.8% in the first quarter of the year.
Last week, the Bank of England warned it expected the UK economy to enter its longest recession since the global financial crisis in the fourth quarter. Meanwhile, inflation is expected to peak above 13% in October.
Monthly estimates showed GDP fell 0.6 percent in June, less than the consensus estimate of 1.3 percent but less than a revised 0.4 percent increase in May.
“UK growth has stalled as the economy faces challenges from a severe contraction in real income amid rising inflation and higher interest rates,” said Hussain Mehdi, macro and investment strategist at HSBC Asset Management.
“Against this backdrop, it will be difficult to avoid recession, especially with the risks of rising energy prices heading into the winter.”
According to consultancy Cornwall Insight, the UK energy price cap would reach £4,266 ($5,191.96), which would leave millions of households struggling to pay their bills.
Despite macroeconomic headwinds, however, HSBC is backing UK large-cap stocks to continue to outperform this year, given “commodity, value and defensive name exposure”.
The Office for National Statistics, which released the growth figures, said the contraction was largely due to a fall in service output, with the biggest drag coming from health and social work activities, reflecting a drop in Covid activity. -19.
It noted that there was a 0.2% decline in household consumption in the second quarter, offset by a positive contribution from net trade.
“Like clockwork, inflation has begun to weigh on economic activity in the UK, with household spending contracting by 0.2% quarter-on-quarter,” said Barrett Kupelian, senior economist at PwC.
Inflation hit a 40-year high of 9.4 percent in July and is expected to continue rising through the fall.
“There has been some positive news for consumer-facing sectors, including hospitality, but this is likely to be short-lived as cooler weather sets in and tourism declines,” Kupelian said.
“The UK has entered an environment of low growth and high inflation. With the Bank of England tightening financial conditions, all eyes are now on policymakers to help shape the future sources of growth.”
This is a news in progress and will be updated soon.
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