Recession on the cards

The chances of Britain entering an imminent recession is looming large once again after worse-than-expected growth figures out today showed that the UK economy shrank by 0.5 per cent in July.

This is a steeper decline than the 0.2 per cent forecast and is the third time in six months that GDP has contracted. Yet some sunnier months in between, like June which saw 0.5 per cent growth, means we are not yet in a technical recession – a measurement typically defined as when GDP falls for two quarters in a row. 

The wettest July since 2006 dampened economic activity, keeping shoppers at home and reducing activity in the construction sector. 

And a doubling of days lost to strikes between June and July also contributed to the stagnation.  

The human health activities industry contracted by 3.4 per cent last month, which is mainly due to industrial action by junior doctors, consultants and radiologists. 

How troubled should we be by these latest ONS figures? 

Some factors which contribute to monthly fluctuations – like a few unusually wet weeks – aren’t representative of wider trends. And this sort of volatility is why economists prefer to compare trends over quarters. The economy did still grow in the three months to July as a whole – albeit by a sluggish 0.2 per cent. 

Troubling or not, these figures are hardly surprising, says Doug McWilliams, Deputy Chairman of Cebr.

“We’ve been expecting this,” McWilliams told Reaction. “There is an inventory cycle going on worldwide which affects the UK. But also the impact of past interest rate rises is gradually working through. We still expect a technical recession.”

Rising interest rates are designed to cool the economy. The aim is to bring price rises down but the simultaneous effect is that the growth prospects are hindered. 

So July’s poorer-than-expected GDP performance is perhaps a sign that 14 consecutive interest rate hikes are starting to properly bite. Take, for instance, the decline in construction output: bad weather may have played a part here but the slowdown in the housing market may also be a factor – a slowdown prompted by tighter monetary policy and steeper mortgage costs. 

How will this new data affect the Bank of England’s Monetary Policy Committee when it meets next week to mull over further interest rate rises? 

Some economists hope these poor stats could persuade the MPC to pause rate hikes.

Yet most recognise this is wishful thinking.

What makes a pause even less likely is another set of gloomier-than-anticipated economic data which came in today across the Atlantic.

According to new figures, US inflation rose 3.7 per cent in August, up from 3.2 per cent in July, driven largely by a sharp increase in petrol prices and rent. 

The Fed is now more likely to press ahead with further rate hikes, putting Britain’s central bank under further pressure to follow suit. 

Which is why despite edging closer to recession, we are still likely to see interest rates increase to 5.5 per cent next week.

As McWilliams, who predicts a rate rise, points out: “Given that the bank has lost credibility, it will probably have to overshoot on the hawkish side to try to regain inflationary credibility.”

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