Economy contracts 0.1% amid cost of living crisis

Economy contracts 0.1% amid cost of living crisis

The economy shrank in the second quarter of the year as consumers started to tighten their belts against the cost of living crisis.

Gross domestic product fell by 0.1 per cent between April and June this year, compared to growth of 0.8 per cent in the previous quarter, according to the Office for National Statistics.

A fall of 0.6 per cent was seen in June, following a 0.4 per cent increase in May which was revised down from initial estimates of 0.5 per cent.

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The shrinking of the Covid test and trace and vaccination programmes led to a 0.4 per cent drop in services in the quarter.

A 0.2 per cent decrease in real household consumption was offset by a positive contribution from net trade, although the ONS warned those figures might not be reliable due to changes in data collection for EU trade.

Director of economic statistics at the ONS, Darren Morgan said the fall in June was “notable”.

“Health was the biggest reason the economy contracted [in Q2] as both the test and trace and vaccine programmes were wound down, while many retailers also had a tough quarter.”

“These were partially offset by growth in hotels, bars, hairdressers and outdoor events across the quarter, partly as a result of people celebrating the Platinum Jubilee.” 

Chancellor of the exchequer, Nadhim Zahawi said: “I know that times are tough and people will be concerned about rising prices and slowing growth, and that's why I'm determined to work with the Bank of England to get inflation under control and grow the economy."

Macro and investment strategist at at HSBC Asset Management, Hussain Mehdi, said the economy faces challenges from a “severe” income squeeze, and it will be hard to dodge a recession this winter.

"However, despite this increasingly gloomy macro backdrop, we think large-cap UK equities can continue to outperform this year given exposure to commodity, value and defensive names," he said. 

Chief executive officer of You Asset Management, Derrick Dunne, was also positive.

“While undoubtedly bleak, today’s data comes as no huge surprise, with the Bank of England making no secret of the fact that it’s heightened focus on tackling inflation could dampen economic growth – and most likely drag the UK into a recession by the end of this year,” he said.

Despite all this, he added, there are some “clear glimmers of hope” for investors to hold onto as supply chains begin to recover from the pandemic.

Consumer sentiment could also improve due to a recession reducing inflation concerns.

“As we navigate the next few months, investors should try to be patient and seek reassurance in the fact that recovery will come, albeit not immediately.”