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Recession looks likely despite UK economy returning to growth

Author: ICAEW Insights

Published: 12 Sep 2022

Latest official GDP estimate confirms that the UK economic growth rose in July after shrinking in June.

Economic indicators are further fuelling concerns of the UK economy dipping into recession in Q3, with the extra bank holiday for the Queen’s funeral likely to further impact on this month’s output.

UK gross domestic product (GDP) is estimated to have grown by 0.2% in July 2022 following a fall of 0.6% in June (revised up from a 0.3% fall), according to the latest monthly figures released on 12 September by the Office for National Statistics (ONS). Looking at the broader picture, GDP was flat in the three months to July compared with the previous three months.

Services grew by 0.4% in July 2022, after a fall of 0.5% in June, and was the main driver to the rise in GDP. Information and communication grew by 1.5% and was the largest contributor to the services growth in July. 

Output in consumer-facing services grew by 0.6% in July but remains 4.3% below its pre-COVID-19 level. The wholesale and retail trade and repair of motor vehicles and motorcycles industry was the largest positive contributor in consumer-facing services, growing by 4.0% in July 2022. 

The second largest driver in consumer-facing services growth was sports activities and amusement and recreation activities, which saw growth of 8.1%, in a month that included the UK hosting both the Women’s EURO Championship and the Commonwealth Games.

Production output fell by 0.3% in July, with electricity, gas, steam and air conditioning supply the main driver of negative growth, falling by 3.4% on the month having previously increased by 3.1% in June. In particular, output across electric power generation, transmission and distribution fell by 4.4%, with manufacture of gas also falling by 0.5%. 

Anecdotal evidence from the Department for Business, Energy and Industrial Strategy, suggests that demand for electricity in July this year was 2.3% lower than in July 2021, suggesting signs of shifts in consumer behaviour and lower demand in response to increased prices.

Construction output decreased by 0.8% in July, after a 1.4% fall in June. This follows seven consecutive months of growth in the sector between November 2021 and May 2022. The decrease in monthly construction output in July came solely from repair and maintenance, which fell 2.6%. This was partially offset by a small rise in new work (0.3%). 

At the sector level, seven of the nine sectors saw a decrease on the month in July, with all sectors in repair and maintenance seeing a fall. Public housing (both new work and repair and maintenance) also saw notable falls of 13.1% and 8.0%, respectively.

Responding to the UK GDP figures for July 2022, released by the Office for National Statistics on Monday 12 September 2022, Suren Thiru, Economics Director for ICAEW, said: “Although output rebounded in July this more reflects a flattering comparison with June, where the extra bank holiday limited activity, than a meaningful upswing in the fortunes of the UK economy.

“Despite July’s uptick, with warning lights of recession flashing red on most economic indicators and next week’s bank holiday likely to limit September output, the chances of the economy slipping into a downturn in the third quarter is growing. 

“The support for households and business should mean that any downturn is shorter and shallower than previously expected. However, with such an intervention likely to be accompanied by a punishing rise in interest rates, many are still facing a harsh winter.”

For further information, read the ONS Monthly GDP estimate.

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