UK GDP falls by 0.5% as recession fears rise

UK GDP fell by 0.5% in July, following growth of 0.5% in the previous month, the latest ONS statistics show.

There were falls in all three main sectors, driven by strike action and wet weather affecting the construction and retail industries.

Services output was down 0.5% in July 2023, after growth of 0.2% in June 2023, and was the main contributor to the fall in GDP in July.

Looking at the broader picture, GDP increased by 0.2% in the three months to July, with growth in all three main sectors.

Industry experts have now warned against further interest rate rises, saying a shallow recession is increasingly likely over the remainder of the year.

Derrick Dunne, CEO of YOU Asset Management, commented: “The UK experienced a sharp 0.5% drop in GDP for July, driven by weak performance in all of the key sectors.

“For The Bank of England, the balance between fighting inflation without inhibiting economic growth is becoming increasingly tough, and so we hope today’s release will offer food for thought as to whether high inflation – and subsequently, wage growth – are the most pressing issues on a forward-looking basis.

“This is particularly pertinent with another interest rate rise now hotly anticipated next week. Since the restrictive effects of rate hikes can take between 9-12 months to be fully felt in an economy, it’s possible today’s drop will only be the tip of the iceberg in terms of economic pain.

“It’s understandable, if not acceptable, that this is the environment we find ourselves in. However, as the first half of 2023 has shown us, uncertain economic conditions do not mean poor investment returns. An appropriately diversified portfolio, underpinned by support from a high-quality financial adviser, is the best approach during these times.”

Jeremy Batstone-Carr, European strategist at Raymond James Investment Services, said: “Today’s GDP drop of 0.5% provides further evidence that the UK economy’s resilience is starting to wane and suggests a shallow recession is increasingly likely over the remainder of the year.

“All sectors of the economy have started the third quarter under pressure, with the service and retail sectors particularly hard hit due to an unusually wet July. On top of this, the lagged impact of earlier interest rate hikes are being felt throughout the economy. If banks continue to curtail credit and withdraw lending, the economy will fail to gain any real traction. The Bank of England should be careful of further rate hikes with this in mind.

“The labour market is of even more pressing concern to the Bank of England. Wage growth in the 3 months from May to July rose 8.5% year-on-year, above all forecasts, which potentially locks in a big increase in public pensions next April. Pronounced wage pressures, added to contracting activity, leave little room for error amongst interest rate-setters. The Bank of England must tread a very fine line to lower inflation without deepening the incoming recession through overzealous rate hikes.”

Marcus Brookes, chief investment officer at Quilter Investors, added: "Today’s drop of 0.5% in GDP shows that the economy is buckling under the strain of repeated interest rate increases.

"Unfortunately the news shows just how complex and challenging the country's economic landscape still is. The Bank of England's governor, Andrew Bailey, weighed in recently signifying that interest rates are nearing their peak, especially after a 14th consecutive hike that saw them rise to 5.25% last month. Although this offers some respite to homeowners and the housing market, which has been grappling with high mortgage rates, the broader economy still remains under serious pressure illustrated by today’s lacklustre GDP figure.

"One positive that has emerged in recent weeks are revelations from the Office for National Statistics that the UK's economic recovery post-pandemic seems to have been stronger than initially reported. Notably, 2021's GDP growth saw an upward revision, revealing an 8.7% increase. This data suggests that by the time the Omicron variant emerged, the UK's economy was already 0.6% above its pre-Covid mark, contrary to the previously believed 1.2% deficit.

"The Bank of England is now at a crucial juncture. With indications that interest rates are reaching their peak and inflation expected to decrease by the year-end, the direction they take could influence the nation's economic trajectory. But as Bailey pointed out, decisions are now more nuanced. The Bank is no longer in a clear space where interest rate hikes are unequivocally necessary."