Recession fears as UK economy shrinks by more than expected

The UK economy shrank surprisingly sharply in July as retailers and construction projects were knocked by wet weather, sparking fresh fears of a recession.

Experts forecast a 0.2 per cent decline in gross domestic product (GDP) – but official data shows it contracted by 0.5 per cent. The bigger-than-expected slump came after 0.5 per cent growth in June.

Economists said that Britain was “walking a tightrope” after the shock setback – with some saying a recession may have already begun.

Paul Dales, chief UK economist at Capital, said a mild recession may have already begun, with July’s decline suggesting that “underlying growth has lost momentum since earlier in the year”.

Labour said it was another “dismal day” for the economy, but chancellor Jeremy Hunt insisted that there were “reasons to be confident” about the future.

Mr Hunt, who has promised to half inflation by the end of 2023, said: “Only by halving inflation can we deliver the sustainable growth and pay rises that the country needs.”

The chancellor added: “We were among the fastest in the G7 to recover from the pandemic and the IMF have said we will grow faster than Germany, France, and Italy in the long term.”

Economists pointed out that weak GDP growth in the third quarter is now likely to fall short of the Bank of England’s +0.4 per cent forecast.

But most still expect the push to curb inflation will mean governor Andrew Bailey and the monetary policy committee at the central bank will hike interest rates on final time – from 5.25 to 5.5 per cent – next week.

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Labour’s Rachel Reeves, shadow chancellor, said: “Today is another dismal day for growth, and the British economy remains hostage to the Conservatives’ low growth trap that is leaving working people worse off.”

The Liberal Democrats’ Treasury spokesperson Sarah Olney said Tory “mismanagement” of the economy was now a “burden on any chance of growth”, adding: “Rishi Sunak has utterly failed to get a grip on the cost of living crisis.”

Darren Morgan, ONS director of economic statistics, said “the broader picture looks more positive”, despite the fall in GDP, with the economy growing across the services, production and construction sectors in the last three months.

He pointed to the imact of NHS strikes as well as wet weather. “In July, industrial action by healthcare workers and teachers negatively impacted services, and it was a weaker month for construction and retail due to the poor weather.”

The Federation of Small Business called on Mr Hunt to “lighten the burden of business rates” at the Budget after the “disheartening” GDP slump.

Mr Hunt remains under pressure from Tory MPs to cut taxes in a bid to boost growth. But the chancellor is reportedly considering making real-terms cuts to benefits to make space for pre-election tax cuts.

Labour MPs have warned that it would be “catastrophic” for families if Mr Hunt did not raise working benefits in line with inflation as usual.

It comes as Rishi Sunak’s ministers mull a “tweak” to the triple lock to limit costs, so that pensioners may not get a bumper 8.5 per cent increase in the state pension.

Under the triple lock – which guarantees an increase in line with average earnings, inflation or 2.5 per cent, whichever is highest – pensioners would have been in line for a rise linked to wages from April.

But ministers are considering whether to strip out the impact of public sector bonuses on the earnings figure, which could mean an increase of around 7.8 per cent instead.

Work and pensions secretary Mel Stride stressed the need for any increases to take into account “affordability and the position of the economy”.

Mr Stride insisted the government remains committed to the triple lock. But asked whether that would be based on earnings including bonuses, the 8.5 per cent figure, he told BBC Radio 4’s World At One, Mr Stride said he did not want to “get into the weeds”.