U.K. Economy Shrinks 0.5% in July, Exceeding Forecasts

LONDON — The U.K. economy experienced a 0.5% contraction in July, exceeding the anticipated 0.2% decline predicted by economists in a Reuters poll.

According to the Office for National Statistics (ONS), the primary contributor to this downturn was a 0.5% drop in services output.

Despite a stronger-than-expected performance in the second quarter, with a reported 0.2% growth, July’s figures indicate the fastest economic contraction since December.

This downturn is the latest evidence of economic strain under a high interest-rate environment. Recent data showed a significant increase in U.K. mortgage arrears, reaching a seven-year high for the quarter ending in June.

In response to these figures, major investment banks have revised their growth forecasts for the U.K. Goldman Sachs has lowered its annual growth estimate from 0.5% to 0.3%, while JP Morgan has reduced its 2023 forecast from 0.6% to 0.4% and its 2024 forecast from 0.4% to 0.2%.

James Smith of ING noted that while the economy is still growing, it is doing so marginally, and a mild recession cannot be ruled out.

Paul Dales of Capital Economics suggested that the recent GDP data might signal the beginning of a mild recession, with underlying growth losing momentum.

Dales pointed out that factors such as strikes and severe weather have affected certain sectors, contributing to broader economic weakness.

Despite this, he anticipates that the Bank of England will likely raise interest rates from 5.25% to 5.50% in its upcoming meeting, given persistently high wage growth.

The British pound fell 0.2% against the U.S. dollar to $1.245 and also declined against the euro.

Jane Foley of Rabobank highlighted the Bank of England’s challenging position due to strong earnings data coupled with slower growth, suggesting that recent data increases the likelihood of the bank reaching its peak rate this month, which could further pressure the pound.