United Kingdom: GDP records sharpest contraction since Q1 2021 in the second quarter
GDP contracted 0.1% on a seasonally-adjusted quarter-on-quarter basis in the second quarter, contrasting the 0.8% expansion recorded in the first quarter and broadly in line with our analysts’ expectations. Q2’s reading was the worst performance since Q1 2021.
Private consumption declined 0.1% in Q2 (Q1: +0.5% s.a. qoq), amid higher inflation and interest rates, and weaker sentiment. Government consumption dropped 2.9% (Q1: -1.3% s.a. qoq) due to lower spending on Covid-19 related health activities. Fixed investment growth slowed to 0.6% in Q2, from the 3.8% increase logged in the previous quarter. More positively, business investment bounced back in the quarter.
Exports of goods and services rebounded, growing 2.4% in Q2 (Q1: -4.4% s.a. qoq). Conversely, imports of goods and services deteriorated, contracting 1.5% in Q2 (Q1: +10.4% s.a. qoq).
On an annual basis, economic growth lost momentum, cooling to 2.9% in Q2, following the previous quarter’s 8.7% increase.
The economy is expected to flirt with a technical recession (two consecutive quarters of contracting GDP) over the next 6–12 months, on the back of a surge in energy bills from October, higher interest rates and softer momentum abroad. Possible further fiscal support under the new Prime Minister will be a key factor to watch.
Commenting on the short-term outlook, ING’s James Smith was downbeat:
“The [energy price] cap is now likely to hit around £3,500 in October and could potentially get close to £5,000 by the second quarter of next year (though should fall back more noticeably later in the year). While such estimates are very volatile, it does mean that whichever candidate wins the leadership contest will be under huge pressure to significantly ramp up the size of those support payments. We’ll have to wait and see what the new prime minister offers in terms of support, but at the very least a fall in fourth-quarter GDP now looks highly likely.”