- The UK economy saw a broad-based contraction in July, giving back the entirety of the previous month's strong rise in GDP. Erratic factors were at play, but it's now looking more touch-and-go whether output will expand in Q3. And any growth is set to remain in line with the very subdued trend of the last 12 months.
- With the impact of higher interest rates ratcheting up, along with still-high inflation and fiscal drag, that softness is likely to characterise the economy for the rest of this year and into 2024. The EY ITEM Club’s base case is that a recession will be avoided, but near-stagnation won't feel much different.
Martin Beck, Chief Economic Advisor to the EY ITEM Club, says: “After GDP growth in June was boosted by the month having one extra working day compared with May and a rise in manufacturing output, July had seemed destined for a reversal. In practice, a 0.5% month-on-month fall in GDP that month was bigger than the consensus expectation of a 0.2% decline.
“The sectoral breakdown showed a 0.5% fall in services output accounted for much of the fall. A steep decline in health output was the main culprit here, reflecting the effect of strikes (the total number of working days lost in July was at a three-month high and 75% more than in June). A drag from unusually wet weather on retail spending may have also exaggerated services’ weakness. The wet weather probably also played a role in a 0.5% contraction in construction. Meanwhile, industrial output fell 0.7%, meaning all three main sectors shrank for the first time since June 2022.
“The role of erratic factors in July's weakness means the economy probably saw some bounce back in August. But it's now looking less clear that GDP will expand meaningfully in Q3. Any growth is on course to be very modest, continuing the trend of near stagnation which has characterised the UK economy over the last 12 months. And the EY ITEM Club thinks that prognosis will remain broadly true over the rest of this year and into 2024.
“For sure, still-strong pay growth, falling inflation and healthy household balance sheets offer positives for consumption. Business investment has been surprisingly strong recently and the Government may loosen fiscal policy in the run-up to the next election. But household finances face growing pressures from the lagged effect of past rises in interest rates, fiscal drag and a labour market fraying around the edges. Other drivers of GDP face headwinds too. On balance, the EY ITEM Club thinks a recession will be avoided. But the prospect of quarterly growth hovering only a little above zero won't feel much different.”