The UK economy contracted 0.1% in Q2 2022, coming in slightly above analyst expectations of a 0.2% shrinkage according to the ONS.
However, the figure represented a dramatic slowdown against the 0.8% growth in seen in Q1.
GDP contracted as a result of skyrocketing inflation, which currently stands at 9.4%, and the consequent lack of consumer spending as households brace for a harsh winter ahead this year.
“It is too early to start shouting ‘recession’ but the 0.1% contraction in the economy between April and June is adding to concerns that it’s most certainly round the corner,” said AJ Bell investment analyst Danni Hewson.
“Another three months will tell the tale, and as many households are already cutting back on both discretionary spend and everyday essentials, while businesses struggle under the chokehold of sky-high inflation, the mood music is sombre.”
The economy saw a 0.4% slide in May, revised from an initial estimate of 0.5%, despite the addition of an extra business day after the Whitsun bank holiday was transferred to June.
Summer took an additional blow in the form of a 0.6% fall in June linked to the closure of factories and businesses over the Jubilee holiday.
“June’s 0.6% fall had been expected, although the joy of the Jubilee bank holiday was a double-edged sword for the economy,” said Hewson.
“Whilst bars and restaurants, hotels and festivals provided a welcome distraction from the day to day, it also meant two days when offices were closed, factories idled and building sites fell silent.”
The manufacturing and construction sector reported 2.3% rise, after rising demand for work and repair contributed to growth across the industry.
Meanwhile, services fell by 0.4% as the boost delivered in May via GP Visits and summer holiday bookings were not sustained into June and Track and Trace and Covid measures continued to fade away from consumer usage.
“And whilst a surge in GP visits helped offset the fall in covid measures in May, it couldn’t do the same for June’s numbers,” said Hewson.
“Track and Trace, lateral flow testing and booster vaccines have gradually been petering out.”
“And the surge in bookings seen at travel agents also couldn’t be sustained; this year’s summer holiday could only be booked once and the pressure on budgets is unlikely to leave any wiggle room for many bonus breaks.”
Real household consumption dropped 0.2%, driven by declining net tourism, clothing, food and non-alcoholic beverages, restaurants and hotels.
Retail and consumer-facing businesses continued to struggle, unable to catch a break after two years of Covid and the war in Ukraine.
“[Retail] is struggling and consumer facing services as a whole are still 4.9% down on where they were before lockdowns were a thing,” said Hewson.
“A summer of rescheduled celebrations might have sent people scurrying back to hairdressers and beauty salons.”
“But those one-off visits can’t make up for the regular touch-ups that have become less frequent since people got used to having to do it themselves. If money is tight those DIY beauty tactics will most certainly be pressed back into service.”
With inflation on track to hit 13% this year and energy bills set rise as high as £5000 next year, investors would be smart to brace for tough times ahead.
