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UK economy grows slower than expected as higher prices hit growth

UK economy Shoppers and visitors out on Oxford Street on 23rd August 2022 in London, United Kingdom. Oxford Street is a major retail centre in the West End of the capital and is Europes busiest shopping street with around half a million daily visitors to its approximately 300 shops, the majority of which are fashion and high street clothing stores. (photo by Mike Kemp/In Pictures via Getty Images)
The UK economy grew slower than expected. Photo: Mike Kemp/In Pictures via Getty

The UK economy grew by 0.2% in July, a smaller increase than expected, according to figures from the Office for National Statistics (ONS).

Still, it is a return to growth after the economy shrank by 0.6% in June. Looking at the broader picture, gross domestic product (GDP) was flat in the three months to July compared with the previous three months.

The growth rate has lost momentum since the start of the year as rising costs have hit businesses and consumers. Inflation soared to a 40-year high in July, hitting real incomes and profits.

Inflation is soaring
Inflation is soaring. Chart: Yahoo

Services grew by 0.4% in July 2022, after a fall of 0.5% in June 2022, and was the main driver in the rise in GDP.

Information and communication grew by 1.5% and was the largest contributor to the services growth in July.

Stephen Millard, deputy director for macroeconomic modelling and forecasting at NIESR, said: "GDP grew by 0.2% in July following the large fall of 0.6%in June. This was stronger than we had expected and was driven by a rise in services, particularly consumer-facing services, with production and construction continuing to fall.

"That said, GDP in the three months to July was flat relative to the previous three months and we think the UK economy remains in recession."

The ONS said people may have cut back on electricity use following the surge in prices this year.

Read more: Interest rates: UK households expect hawkish hike ahead of BoE meeting

"According to anecdotal evidence from the Department for Business, Energy and Industrial Strategy (BEIS), demand for electricity was 2.3% lower than seen in July 2021 (that may have been influenced by the higher than usual temperatures)," the ONS said.

"Anecdotal evidence suggests that there may be some signs of changes in consumer behaviour and lower demand in response to increased prices.

"This is further shown in our recent Consumer price inflation, UK: July 2022 bulletin where electricity prices rose by 54% in the 12 months to July 2022."

Production fell by 0.3% after a fall of 0.9% in June 2022, as did construction, which dropped by 0.8%, after a fall of 1.4% in June 2022.

Alice Haine, personal finance analyst at Bestinvest, said: “Flattening economic growth in the three months to July was to be expected when you consider the immense challenges the country was facing as the fallout from the war in Ukraine and rising borrowing costs took its toll on the economy.

“The resulting rises in food, fuel and energy prices sent inflation soaring to a 40-year-high of 10.1% in July and forced households and businesses to reevaluate their expenditure.

“Despite this, there was slight GDP growth of 0.2% in July driven by the services sector, with the UK’s decision to host the Women’s Euro Championship and the Commonwealth Games delivering a positive boost to output.

“However, the production and construction sectors contracted in July — a reflection of the shifting economy as Britain really started to grasp the sheer scale of the energy crisis and the fact that price rises were not going to reverse any time soon."

Energy prices will be frozen for two years, Liz Truss has announced (Yahoo News UK/ Flourish)
Energy prices will be frozen for two years, Liz Truss has announced. Chart: Yahoo News UK/ Flourish

A Reuters poll of economists had pointed to month-on-month growth of 0.4% in July.

Yael Selfin, chief economist at KPMG UK, said the economy faces a downbeat outlook after a "feeble" recovery in July.

"More concerning, July’s GDP remains below the level seen in May, pointing to an overall contraction over the first two months of summer.

“This ties into a downbeat outlook for the UK economy which could see another shallow recession from the end of this year, driven by the ongoing squeeze on households’ income and a rising cost burden for businesses.

“While nearly £170bn ($197.8bn) worth of fiscal measures announced last week may be sufficient to avoid a deeper economic slump, these will be partly offset by tighter Bank of England monetary policy focussed on combating the high levels of inflation.”

Read more: Cost of living: UK's poorest households face £800 income gap

The bounce-back in July comes after June’s GDP figure was impacted by the Queen’s Jubilee bank holiday day early in the month, according to the ONS.

Marcus Brookes, chief investment officer at Quilter Investors, said: “Rather surprisingly UK growth bounced back in July after a disappointing figure in June, easing concerns that a recession is on the immediate horizon. Services saw a month of positive growth, boosted by the Women’s Euros and the Commonwealth Games, while production and construction fell.

"However, given this data is from July, the outlook could be bleaker given it comes before a potential slowdown in activity during the period of mourning in the UK."

Watch: What is a recession and how do we spot one?