UK economy beats expectations with smaller decline than expected, but wider concerns remain

Thu 13 Jul 2023
Posted by: Phillip Adnett
Trade News

UK economy trade chart

The UK’s GDP declined by less than expected in May, but the economy is still struggling to shake off the “sticky” inflation problem.

The issue of inflation is one that various leading economies have grappled with, with varying degrees of success.

According to the latest figures from the Office for National Statistics (ONS), the UK economy shrank by 0.1% last month.

Economists polled by Reuters expected to see a larger contraction and predicted that the UK could avoid an economic decline in the second quarter of 2023.

"Our sense is that underlying activity is still growing, albeit at a snail's pace," Paul Dales, chief UK economist with Capital Economics, told Reuters.

Services

Output from consumer-facing services – such as travel, retail and rail transport – was down significantly from pre-Covid times, with the sector as a whole running 8.8% below February 2020.

Of the thirteen industries included in this category, only three had recovered from the pandemic slump: sports and amusement, veterinary, and food and beverage services.

Construction and production output fell by 0.2% and 0.6% in May, meaning both sectors had continued to shrink since April.

‘Sticky’ inflation remains

Despite the news that the national economy could dodge recession, the financial picture remains cloudy.

Although governor of the Bank of England (BoE), Andrew Bailey, predicted in his Mansion House speech that headline inflation is expected to fall over the next year, with lower energy and commodity prices driving this down, it remained “sticky” and “unacceptably high” at 8.7%.

He also said that the economy remained resilient, with unemployment remaining very low. Separate analysis from the BoE showed that the countries eight major banks had passed their annual stress tests and could survive a “severe” economic downturn.

Inflationary behaviours

The continued economic turmoil is having an impact on consumer spending habits, even as the UK avoids a technical recession, according a new report.

Joint research by Grant Thornton UK LLP and Retail Economics found that the average UK household will be £2,300 worse off by the time the cost-of-living crisis comes to an end, described as one of the biggest squeezes in generations.

More troubling news for many businesses is that consumers are adopting ‘recessionary behaviours’ and cutting back spending, with over half (54%) of consumers cutting back on non-essential shopping and almost half (46%) also reducing time spent in pubs, restaurants or other leisure venues.

Almost nine in ten (88%) consumers are expected to cut back and the research indicates this trend is intensifying, as consumers across all income brackets intend to cut back ‘all’ areas of spending rather than just ‘some’.

Overall, this will reduce household spending power by £65bn by the time the crisis ends, according to the research.

Wider issues

On the global stage, the picture appears equally unclear, with various major economies facing a precarious short-term future.

China’s exports fell at the fastest rate since the pandemic, with a 12.4% drop-year-on-year in June. Economists polled by Reuters predicted a decline of 9.5%.

China, the world’s biggest exporter, faces dual problems of a wider slowdown in the world economy coupled with the damaging effects of trade tensions with the US.

Eurozone

In Europe, Dutch banking house ING says that while industrial production was up by 0.2% across the Eurozone, it was a “coin flip” on whether the economic area could avoid a technical recession.

Flash estimates from Eurostat, the EU’s statistical office, shows that inflation is expected to fall to 5.5% in June, down from 6.1%.

The European Commission’s June Standard Eurobarometer survey of citizen’s attitude showed that perceptions of the economy and the EU’s recovery plan had improved, although inflation still remained a concern for many.

US

In the US, president Joe Biden’s administration is attempting to portray a picture of health for the American economy.

Lael Brainard, director of the National Economic Council, said in a recent speech that the economy was “defying predictions” that it was possible to reduce inflation without impacting jobs,

A recent jobs report showed that the economy added 209,000 jobs in June, leaving the rate of unemployment at 3.6%,

The Guardian reports that US inflation rates slowed to their lowest for almost two years, reaching 3%. Prices, however, remain high.