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UK Economy Recovers Slower Than Expected From Bank Holiday Slump

·3 min read
UK Economy Recovers Slower Than Expected From Bank Holiday Slump

(Bloomberg) --

Most Read from Bloomberg

The UK economy recovered more slowly than expected from a slump triggered by an extra public holiday in June, with industrial production and construction both shrinking.

The 0.2% expansion followed a 0.6% decline in June, when gross domestic product was curtailed by an extra day off to mark Queen Elizabeth II’s jubilee, the Office for National Statistics said Monday. Economists had expected 0.3% growth.

The death of the queen and another holiday for her funeral on Sept. 19 may be enough to tip the economy into recession in the current quarter, analysts at Nomura and Deutsche Bank say. Consumers and businesses are struggling under the weight of soaring inflation and energy bills, even with Prime Minister Liz Truss’s package of measures to freeze further increases in natural gas and electricity costs.

“This ties into a downbeat outlook for the UK economy which could see another shallow recession from the end of this year, driven by the ongoing squeeze on households’ income and a rising cost burden for businesses,” Yael Selfin, chief economist at KPMG UK.

Led by Services

What growth there was in July was driven by the information and communications sector and consumer-facing services, which rebounded 0.6%, partly due to one-off events such as the UK hosting of the Women’s EURO soccer championship and the Commonwealth games. Both industrial production and construction fell in July 2022, by 0.3% and 0.8% respectively, marking the second consecutive fall for both these sectors.

The outlook for the rest of the third quarter seems bleak, with key purchasing-management data showing private-sector activity contracted in August. A summer of stagnation was already forecast but the death of the queen means the economy could now shrink for a second straight quarter.

What Bloomberg Economics Says...

“There’s a risk the UK slips into a technical recession in the third quarter -- as the country mourns Queen Elizabeth II’s death with an additional national holiday in September. More significantly, we think the government’s £150 billion energy support package means the recession won’t last over the winter.”

--Dan Hanson and Ana Luis Andrade. For full REACT, click here

A freeze on energy prices from October, announced by Truss last week, will reduce peak inflation and may be enough to stop the economy slipping into a full-blown recession this year.

However, the multi billion-pound stimulus is likely to force the Bank of England to keep interest rates higher for longer, which could lead to a contraction next year.

Rate Hikes

Investors are pricing in a half-point increase and potentially more on Sept. 22, with the benchmark rate hitting almost 4.5% by the middle of next year compared with the current 1.75%.

Separate figures showed Britain’s trade deficit in the three months to July remained close to record highs at £27 billion. The small improvement on the record £27.9 billion in the second quarter came on the back of strong exports of fuel, machinery and transport equipment to the European Union.

Total goods exports rose £2.1 billion in July, including £1.3 billion to the EU, while imports decreased by £500 million. The UK has been exporting oil and gas to the Netherlands and France amid the energy crisis.

The narrowing of the deficit in goods was slightly offset by a deterioration in the services surplus in the three months to July. Markets are concerned that, with the trade deficit at record levels, the UK faces a balance of payment crisis. The pound has dropped 15% this year against the dollar.

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