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UK economy contracts in Q2 with worse to come

Author: ICAEW Insights

Published: 12 Aug 2022

Latest official GDP estimate confirms UK economic output contracted in the second quarter of the year as one-off factors and soaring inflation dampened activity.

The latest GDP figures released on Friday 12 August 2022 by the Office for National Statistics (ONS) reported that UK gross domestic product (GDP) is estimated to have contracted by 0.1% in Q2 2022, down from growth of 0.8% in the previous quarter. The level of quarterly GDP in the UK is now 0.6% above its pre-COVID-19 level in Q4 2019.

On a monthly basis, UK GDP contracted by 0.6% in June, the biggest fall since the last COVID-19 lockdown in January 2021. This is after growth of 0.4% in May 2022 (revised down from 0.5%). The Platinum Jubilee limited activity in June, as moving the May bank holiday into June led to an additional working day in May 2022 and two fewer working days in June.

By sector, services output fell by 0.4% in Q2 2022 with the largest negative contribution from human health and social work activities, reflecting a reduction in COVID-19 services such as free testing.

Production output rose by 0.5% in Q2 2022, a slowdown compared with the previous quarter when it increased by 1.3%. The level of production output remains 1.2% below pre-pandemic levels. Construction output rose by 2.3% in Q2 and is now 2.7% above pre-COVID-19 levels.

Real household expenditure (after accounting for inflation) fell by 0.2% in Q2 2022, which was driven by falls in net tourism, clothing and footwear, food and non-alcoholic beverages, and restaurants and hotels. This was partially offset by rises in expenditure on transport, housing and health.

Business investment rose by 3.8% in Q2 2022, the biggest quarterly rise since Q2 2021 and up from the 0.6% fall recorded in Q1. However, business investment is still 5.7% below its pre-COVID level, compared to overall UK GDP which is 0.6% above its pre-COVID level. Declining spending on transport equipment amid ongoing supply chain disruption was a key driver behind the overall drop in business investment in the first quarter. All assets contributed positively to the jump in Q2 business investment with the largest contribution coming from 'other buildings and structures' (non-residential buildings, roads, bridges etc). 

Latest data covers the period with the govt super-deduction in place. However, the ONS has said that “there has however been little reference to this temporary tax relief in respondent comments to QCAS” (Quarterly Acquisitions and Disposals of Capital Assets Survey).

The UK’s trade deficit for goods and services improved to a 4.7% of nominal GDP in Q2. Excluding non-monetary gold, the trade deficit was 4.5% of nominal GDP.

Responding to the latest GDP figures released by the ONS, Suren Thiru, Economies Director for ICAEW, said: “The UK economy is sliding closer to recession and the worst is yet to come. Although the Jubilee celebrations distorted activity in June, falling output in the key services sector and flatlining manufacturing production in the second quarter indicates a deepening malaise as crippling inflation increasingly stifles economic activity. 

“Business investment remains worryingly short of pre-COVID levels, despite a strong uptick in the quarter. Soaring cost pressures are leaving firms with little headroom to invest, restricting the UK’s ability to lift productivity.

“The economy should rebound in July, but the speed at which spiralling energy bills and inflation are devastating people’s incomes means that a winter recession looks unavoidable. With these headwinds increasingly limiting firms’ ability to operate and invest, the downturn may be more painful than the Bank of England predicts.

“Against this backdrop, the case for the Monetary Policy Committee shifting gear on interest rates to a more moderate pace of monetary tightening is only likely to grow.” 

Editors Notes

The UK National Accounts are drawn together using data from many different sources. This ensures that they are comprehensive and provide different perspectives on the economy, for example, sales by retailers and purchases by households.

For further information, read the GDP first quarterly estimate, UK: Q2 2022 and GDP monthly estimate, UK: June 2022

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