Statistics

UK Economy Contracts In 2Q 2022 – Reactions

Amanda Cheesley, Deputy Editor, London, 15 August 2022

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After new figures published on Friday show that the UK economy contracted less than expected by analysts in the second quarter of 2022, investment managers discuss the outlook, the mounting risk of recession and what this will mean for interest rates.

Official figures released by the Office for National Statistics show that UK gross domestic product shrank by 0.1 per cent in the second three months of the year, less than the 0.2 per cent contraction forecast by analysts.

It comes after GDP rose by 0.8 per cent in the first three months of the year. The figures also follow the Bank of England's warning last week that it expects the UK economy to enter into a recession in the fourth quarter of 2022 and that inflation would reach 13.3 per cent in October.

Here are some reactions to the figures from investment managers.

Tom Hopkins, portfolio manager, BRI Wealth Management
“UK GDP came in at -0.1 per cent in the second quarter 2022, marginally better than the -0.2 per cent consensus expectation. Despite this reading beating expectations, the figure still shows the UK in negative growth which comes as no real surprise as the UK is at a growing risk of slipping into a technical recession.

“The contraction can be attributed to a weak level of activity in June, in the wake of the extended bank holiday to celebrate the Queen’s jubilee –additionally, rampant inflation, exacerbated by the war in Ukraine and pandemic-related supply chain disruptions, and the deepening cost-of-living crisis.

“Last week the Bank of England gave a very gloomy outlook for the UK economy, predicting that the UK is heading for a 15-month recession. They also predicted that inflation would peak at 13 per cent and remain above 10 per cent for much of 2023 resulting in the worst hit to household living standards in 60 years. Notably the pound is one of the worst performing out of the G10 currencies this year, having fallen almost 10 per cent against the US dollar in 2022. In the MPC’s view, trying to curb these pressures requires painful medicine: higher interest rates to slow demand and to take some of the heat out of the jobs market even as high energy prices are already squeezing consumer incomes. As we look at other economies, the US is in a technical recession and if the rest of the EU, too, slides into recession, then maintaining much economic momentum here will become difficult.” 

Azad Zangana, senior European economist and strategist, Schroders
“Better-than-expected UK economic performance may come at the cost of higher interest rates as the Bank of England shows a new focus on taming inflation.

“The expenditure breakdown shows that the winding down of Covid-related activity had a significant negative impact on government spending. Human health and social work activities fell by 5.4 per cent, as government spending overall fell 2.9 per cent in real terms. This was the largest drag on GDP over the quarter, contributing -0.6 percentage points (ppts). Household consumption fell, shaving 0.1 ppts from GDP, while the external sector and inventories helped offset some of the decline. Net trade added 1.1 ppts as export volumes grew by 2.4 per cent while imports declined by 1.5 per cent. It’s worth mentioning that over the first half of the year, exports were down 2.1 per cent while imports were up 8.8 per cent, and so the latest trade figures are not yet cause for celebration.

“Higher inflation is also playing a role in depressing real GDP. In nominal terms, the economy grew 1.1 per cent over the quarter, including 2.6 per cent growth in household expenditure. This pattern is likely to continue over the next year, as rising inflation reduces spending and output in real terms, even if growth continues to be positive in nominal terms.

“Looking ahead, we should see a small bounce in the economy in the third quarter as the impact from the extra bank holiday reverses. As we enter the winter months, however, higher energy bills are likely to seriously hit household spending, potentially causing a recession by early next year.

“The new Prime Minister is likely to attempt to the ease pressure of the cost-of-living crisis with tax cuts, even if it adds to wider inflation pressures across the economy. Meanwhile, the Bank of England is likely to keep raising interest rates. The better-than-expected GDP figures help support the view that the BoE can raise interest rates again by 0.5 per cent at its next policy meeting.”

Shweta Singh, senior economist, Cardano
"This morning’s [Friday 12 June] GDP data release for June and the second quarter of 2022 shows a mixed picture of the UK economy’s health. The underlying details of the release reveal the severe squeeze on consumers from high inflation.

“While the positive trends in business investment may be difficult to maintain with the expiry of ‘super-deduction’ in taxes in early 2023, it is the consumption categories, particularly the household sector, where we see the UK’s underlying economic vulnerabilities lie.

“Weaker consumption could lead to a potentially sharp reversal of the primary growth driver of the last year. As nominal wage growth struggles to keep up with accelerating inflation into the autumn, we expect there to be further spending restraint by households, particularly in discretionary sectors. Conversely, we do expect fiscal spending to pick up as the government’s cost of living package gets underway more fully. 

“In summary, the UK economy faces powerful headwinds. Consumers – the erstwhile growth drivers – will struggle the most, while capex and exports will likely fail to fill the gap adequately. Fiscal policy will help but will be unable to offset the drag from dwindling private consumption and investment.”

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