UK economy contracts by 0.1% in Q2 2022

Shweta Singh, Senior Economist at Cardano, comments on the latest figures:

This morning’s release of GDP data for June and Q2 2022 shows a mixed picture of the health of the UK economy. Real GDP fell by a seasonally adjusted -0.6% in June and by a seasonally adjusted -0.1% in the quarter as a whole. The underlying details of the release reveal the severe squeeze on consumers from high inflation.

The outsized fall in June is largely a function of the timing of the Platinum Jubilee bank holidays. The mechanics of the seasonal adjustment process is confounded by two fewer working days in June and one additional working day in May, relative to a ‘normal’ year. Whilst the consequential boost to activity in the arts, leisure and hospitality sectors is a positive for GDP, the loss to industrial production and construction output is a larger negative.

The quarterly outcome also includes some unusual effects. The wind down of the COVID-19 vaccination and testing programmes shows through in reduced activity, throughout the quarter, in the human health and social work sector. There was also a very noticeable contribution from net trade, offsetting much weaker trends in both household and government consumption.

Whilst 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 would 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 whilst 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.