Quarterly GDP shrinks by 0.1% – industry reaction

The UK economy shrank 0.1% in the second quarter (Q2), data from the Office for National Statistics (ONS) shows.

The data also shows that the economy contracted by 0.6% in June. The decline over Q2 was partly attributed to the test and trace and vaccine programmes coming to an end, a fall in retail sales and the Queen’s Platinum Jubilee bank holiday in June.

Despite the contraction between April and June, the economy avoided recession because GDP grew by 0.8% in the first three months of this year

ONS Director of Economic Statistics Darren Morgan said “With May’s growth revised down a little and June showing a notable fall, overall the economy shrank slightly in the second quarter.”

Commenting on the dat, Suren Thiru, Economics Director for ICAEW, said “The UK economy is sliding closer to recession and the worst is yet to come.

“Although the Jubilee celebrations distorted activity in June, falling output in the key services sector and flatlining manufacturing production in the second quarter indicates a deepening malaise as crippling inflation increasingly stifles economic activity.”

“Business investment remains worryingly short of pre-Covid levels, despite a strong uptick in the quarter. Soaring cost pressures are leaving firms with little headroom to invest, restricting the UK’s ability to lift productivity.”

“The economy should rebound in July, but the speed at which spiralling energy bills and inflation are devastating people’s incomes means that a winter recession looks unavoidable. With these headwinds increasingly limiting firms’ ability to operate and invest, the downturn maybe more painful than the Bank of England predicts.”

“Against this backdrop, the case for the Monetary Policy Committee shifting gear on interest rates to a more moderate pace of monetary tightening is only likely to grow.”

Federation of Small Businesses (FSB) National Chair Martin McTague said “The estimated fall in the headline GDP measure is unwelcome but unsurprising news for small firms, whose confidence nosedived over the quarter, according to our research.”

“The 0.2% real-terms fall in household consumption despite rises in outlay on housing and travel is a flashing alarm for small businesses, many of whom rely on consumer spending.”

“With levels of fuel poverty skyrocketing, fuel and energy costs far higher than they were in the same quarter last year, and rent costs rising steadily, there is less left in people’s pockets for holidays, new clothes, meals out, and other discretionary spending, leading to lower sales for many small businesses.”

“The 1% fall in the wholesale and retail trade over the quarter is deeply concerning, with supply chain disruption causing huge headaches and extra expense for businesses.”

“Small firms were also hammered over the quarter by rising taxes. The National Insurance hikes in April have piled more financial stress onto the cost of running a business, at a time when inflation has spiked to a four decade high.”

“We have been urgently drawing attention to the cost of doing business crisis for months now, as our members tell us that they are struggling to keep up with ever-rising costs – producer input prices rose by 24% in the year to June 2022, the highest level registered since records began in 1985.”

“Adding in the recent jump in the base rate, which means a higher cost of borrowing for many kinds of commercial and personal debt, and which will dampen consumer spending, there’s little sign of any relief coming any time soon.”

“There is no excuse for the Government to sit on its hands, with the very survival of thousands of small businesses at stake, and a recession looming.”

“Today’s figures must be a wake-up call to policymakers that urgent intervention is needed.”

“A menu for recovery should include help for small businesses on energy bills, a reversal of the National Insurance hikes, a VAT cut, a reduction in fuel duty, and rooting out the late payment crisis that leads to the demise of thousands of otherwise viable small businesses every year.”

Richard Pike Chief Sales and Marketing Officer at Phoebus Software, said “Today’s GDP figures really do highlight the volatility of the economy and create many questions. A reduction on the previous three months isn’t a huge surprise, and the Bank of England has already stated it expects a recession to happen in at least the short to medium term. Obviously this is against a backdrop of rising rates and inflation going skywards which in turn is causing many workers to strike for inflation matching pay rises. But with GDP reducing, many businesses have less revenues to hand out inflation busting pay deals.”

“We will undoubtedly see an influx of inbound communication into various agencies such as Citizens Advice by people not just financially struggling today, but perhaps looking at how they will cope in the future. Could it be the right time for lenders and banks to upskill certain staff to be able to give more generic, non-regulated advice on household budgeting and understanding in detail the areas of support that are available today or measures that are coming down the line to be able to engage with customers that are concerned? This sort of proactive behaviour will certainly give early sight of potentially problem cases, but as importantly, will build borrower loyalty and be seen very positively from an ESG perspective, an area that is rapidly becoming more important in our sector.”