UK economy stagnates as cost of living crisis hits spending power

The UK economy stagnated in the three months to July, as the cost of living crisis hit household finances and business activity with growth falling short of expectations.

UK output was flat over the period, according to data from the Office for National Statistics released on Monday, with growth down from the 0.3 per cent registered in the three months to April.

Gross domestic output fell short of the 0.1 per cent expansion forecast by economists polled by Reuters, with the size of the economy in July the same as during the six months before.

The UK growth rate has lost momentum since the start of the year as rising costs hit businesses and consumers. Inflation soared to a 40-year high in July, eroding the money people have available to spend on goods and services.

Output grew 0.2 per cent between June and July, largely reflecting the loss of two working days in June linked to Queen Elizabeth II’s jubilee celebration. In June, the economy contracted by 0.6 per cent, while July’s rebound was weaker than the 0.4 per cent expansion forecast by investors.

“The disappointingly small rebound in real GDP in July suggests that the economy has little momentum and is probably already in recession,” said Paul Dales, chief UK economist at Capital Economics.

Some economists believe that the freeze in average annual household energy bills at £2,500 over the next two years, announced last week by new prime minister Liz Truss, will help support demand in the economy over the coming months.

James Smith, economist at ING, said the package of measures did not guarantee that the economy would avoid sliding into a technical recession, but “should help limit the depth of any downturn over winter”.

However, with many households and businesses already struggling to keep up with payments, even before bills are planned to rise on October 1 when the energy price cap is increased, the UK economic outlook remains downbeat.

“Households still face a further decline in their real incomes during the second half of this year,” said Martin Beck, chief economic adviser to the EY Item Club. “As things stand, the economy is unlikely to do more than stagnate over the coming year.”

Economists expect the Bank of England to raise interest rates for the seventh consecutive time at its next meeting, which is likely to cause a further slowdown in consumer demand. Markets are pricing in a 79 per cent probability of a 75-basis points increase from its current 1.75 per cent.

According to the latest PMI index, economic activity has been contracting since August when consumer confidence dropped to the lowest level since records began.

The services sector rebounded in July, growing by 0.4 per cent and driving GDP growth. Meanwhile, production fell by 0.3 per cent, after a decrease of 0.9 per cent the previous month, with construction activity also registering two consecutive sharp contractions.

Separate data published by the ONS on Monday, showed that the trade in goods and services deficit, excluding precious metals, widened by £1.2bn to £27bn in the three months to July compared with the previous quarter, a near record since comparable data was first collected in 1997.

This widening was due to the surging value of imports, reflecting rising energy prices due to Russia’s invasion of Ukraine and a weak export market.

Gas prices reached a new high in August, with exports likely to continue to struggle as external demand from key trading partners softens and Brexit trade frictions remain.

“The trade deficit will reach enormous proportions over the coming months,” said Gabriella Dickens, economist at Pantheon Macroeconomics.

GDP was estimated at 1.1 per cent above pre-pandemic levels in July, according to the ONS. However, the figure does not factor in revisions that put the pandemic’s hit to economy in 2020 higher than initial expectations.