UK economy shrinks in second quarter as cost-of-living crisis hits

UK economy shrinks in second quarter as cost-of-living crisis hits

Shoppers walk through the rain on Oxford Street, London.

Tolga Akmen/AFP/Getty Images

The UK economy contracted in the second quarter of 2022 as the country’s cost-of-living crisis hit.

Official figures released on Thursday showed that gross domestic product (GDP) contracted 0.1% sequentially in the second three months of the year, less than the 0.3% contraction analysts had expected.

It comes after GDP grew 0.8% in the first quarter of the year.

Last week, the Bank of England warned that it expects the UK economy to enter its longest recession since the global financial crisis in the fourth quarter. Inflation, meanwhile, is expected to peak at over 13% in October.

Monthly estimates showed that GDP fell 0.6% in June, less than the consensus forecast of 1.3% but less than a revised 0.4% expansion in May.

“UK growth is stagnant as the economy faces challenges from a sharp fall in real income amid elevated inflation and higher interest rates,” said Hussain Mehdi, macro and investment strategist at HSBC Asset Management.

“Against this backdrop, recession avoidance will be difficult, especially given the upside risks to energy prices heading into the winter.”

However, despite the macro headwinds, HSBC is betting that UK large cap stocks will continue to outperform this year given its “exposure to commodities, value and defensive stocks”.

The Office for National Statistics, which releases the growth numbers, said the decline was largely due to a drop in service delivery, with the biggest drag coming from health and social care activities, reflecting a decline in Covid-19 activity.

It noted that there was a 0.2% decline in household consumption in the second quarter, offset by a positive contribution from foreign trade.

This is an evolving message and will be updated shortly.