Are we heading into a recession? Economic crisis tipped to hit sooner than expected

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According to figures released by the Office for National Statistics (ONS) today, the UK’s economic output fell by 0.1 percent in the second quarter of the year. The contraction was in large part a result of coronavirus-related healthcare activities slowing down. Last Thursday, the Bank of England (BoE) announced they expected the economy to enter into a recession by the end of the year, as interest rates were raised in a bid to curtail rampant inflation.

The UK’s quarterly GDP – the value of all goods and services produced in the country during a three-month period – is estimated to have fallen by 0.1 percent from April to June, according to the ONS.

The services sector, accounting for around 80 percent of the UK economy, fell by 0.4 percent during the quarter, in large part due to the end of the test and trace programme as the coronavirus pandemic continues to wind down.

However, the results do not mean the country is in a recession – defined as two successive quarters of negative growth – as GDP grew by 0.8 percent during the first three months of the year.

The BoE and most leading economists did not predict a recession until the end of the year, but today’s news had prompted speculation that the slump will hit sooner than expected.

The news also reflects the impact of the cost-of-living crisis on households, many of whom have been forced to cut spending.

Tighter budgets mean less is spent on the goods and services that make up the UK economy, reflected by a 0.2 percent decrease in real household consumption over the quarter.

Shadow Chancellor Rachel Reeves said: “The economy is shrinking. Inflation is skyrocketing. It is clearer than ever that the Conservatives have lost control of the economy.

“With the Bank of England forecasting a recession lasting the whole of next year, the Conservative leadership contenders need to stop playing to the gallery and start coming up with a serious plan to get Britain’s economy back on track.”

In contrast, European Union (EU) GDP increased by 0.6 percent during the same quarter, according to preliminary estimates by Eurostat, the statistical agency of the EU.

The UK economy was outperformed by every other member of the G7 but the US.

Despite the poor growth figure, quarterly GDP for the April to June period is 0.6 percent above pre-coronavirus levels and 2.9 percent higher than the same quarter a year ago.

Whereas the health, retail and finance sectors contracted, consumer-facing services such as travel, hospitality and the arts experienced strong growth as all remaining coronavirus restrictions were lifted from the tourism industry.

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Providing even more detailed insight, monthly estimates published today show that GDP shrank by 0.6 percent in June alone.

Output had fallen by 0.3 percent in April, before increasing by a downwardly revised 0.4 percent in May.

The ONS pinned the June dip on the moving of the May bank holiday to allow for the Queen’s Platinum Jubilee celebrations, leading to a total of two fewer working days in the month.

Reflective of the current exceptionally high rate of inflation, nominal GDP – the country’s economic output at current prices, irrespective of inflation – actually increased by 1.1 percent during the quarter.

In these terms, quarterly GDP is in fact 9.1 percent higher than the same quarter a year prior and 10.5 percent greater than before the pandemic.

In a bid to curb the runaway inflation at the heart of the cost-of-living crisis, the BoE last week voted to raise the UK’s base rate of interest by 0.5 percent to 1.75 percent, its sharpest rate hike in 27 years.

A commonly used tool for slowing down the rate at which prices rise, in making borrowing more expensive the move also discourages spending, further fuelling the risks to economy.

Economists and the BoE now expect a short-term recovery during the third quarter before the UK slips into recession. 

Scheduled from the final quarter of this year, this recession is predicted to last as long as the Great Recession of 2009 but not as deep.

Energy prices were blamed for the dire outlook, increasing sevenfold since the end of last year and set to soar even higher for consumers in October when the energy price cap is set to be lifted again.

Responding to the BoE’s announcement last week, Chancellor Nadhim Zahawi said: “Along with many other countries the UK is facing global economic challenges and I know that these forecasts will be concerning for many people.

“The economy recovered strongly from the pandemic, with the fastest growth in the G7 last year, and I’m confident that the action we are taking means we can also overcome these global challenges.”

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