The economy contracted by 0.1% in the second quarter

Shoppers walk in the rain along Oxford Street in London.

Tola Akmen/AFP/Getty Images

The UK economy contracted in the second quarter of 2022 as the country’s cost of living crisis hit home.

Official figures released on Friday showed gross domestic product (GDP) shrank 0.1% quarter-on-quarter in the second quarter of the year, less than the 0.3% contraction expected by analysts.

It comes after GDP grew by 0.8% in the first quarter of the year.

Last week, the Bank of England warned that it expects the UK economy to enter its longest recession since the global financial crisis in the fourth quarter. For its part, inflation is expected to reach a maximum of over 13% in October.

Monthly estimates showed GDP fell 0.6% in June, less than the consensus forecast of 1.3% but below the revised 0.4% expansion in May.

“UK growth is stalling as the economy faces the challenges of a sharp squeeze on real incomes amid high inflation and higher interest rates,” said Hussain Mehdi, strategist macro and investment from HSBC Asset Management.

“In this context, it will be difficult to avoid recession, especially with the upside risks to energy prices heading into the winter.”

The UK energy price cap is set to reach £4,266 ($5,191.96), leaving millions of households struggling to pay their bills, according to consultancy Cornwall Insight.

Despite macroeconomic headwinds, however, HSBC backs UK large-cap stocks to continue to outperform this year given “commodity exposure, value and defensive names”.

The Office for National Statistics, which publishes the growth figures, said the contraction was largely driven by a fall in service output, with the biggest drag coming from health and social work activities, reflecting a decline in Covid-19 activities.

He noted that household consumption fell 0.2% in the second quarter, offset by a positive contribution from net trade.

“Like clockwork, inflation has started to weigh on UK economic activity, with household spending contracting by 0.2% quarter-on-quarter,” said Barret Kupelian, senior economist at PwC.

Inflation hit a 40-year high of 9.4% in July and is expected to continue rising through the fall.

“There was some positive news from consumer-facing sectors, including hospitality, but this is likely to be short-lived once the cooler weather settles in and tourism activity eases.” Kupelian said.

“The UK has entered an environment of low growth and high inflation. With the Bank of England tightening financial conditions, all eyes are now on policymakers to help shape future sources of growth.”

This is a developing story and will be updated shortly.


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About the Author: Chaz Cutler

My name is Chasity. I love to follow the stock market and financial news!