The second quarter of the U.K. economy sees a decline as the cost-of-living problem bites

TradeGM Analysis date_range August 12th, 2022

In the second quarter of 2022, as the country’s cost-of-living issue took hold, the U.K. GDP shrank.

In the second three months of the year, according to official data released on Friday, the gross domestic product (GDP) decreased by 0.1% quarter over quarter, less than the 0.3% contraction predicted by analysts.

It follows the first quarter of the year’s GDP growth of 0.8%.

The U.K. economy would likely experience its longest recession since the global financial crisis in the fourth quarter, the Bank of England warned last week. Meanwhile, a high in inflation above 13% is anticipated for October.

According to monthly estimates, the GDP contracted by 0.6% in June, which was less than the consensus projection of 1.3% but less than the 0.4% expansion in May.

According to Hussain Mehdi, macro and investment strategist at HSBC Asset Management, “U.K. growth is stagnating as the economy faces headwinds from a severe real income squeeze amid soaring inflation and increasing interest rates.”

“Given this background, it will be challenging to avoid recession, particularly given upside risks to energy costs as winter approaches.”

HSBC predicts that large-cap U.K. shares will outperform this year despite macroeconomic challenges because of their “exposure to commodity, value, and defensive names.”

The Office for National Statistics, which releases the growth numbers, claimed that the decrease was primarily caused by a drop in service production, with health and social work activities, which represent a decline in Covid-19 activities, acting as the biggest drag.

In the second quarter, household spending fell by 0.2%, although this was countered by a boost from net trade, according to the report.

According to senior economist at PwC Barret Kupelian, “inflation has started to take a toll on U.K. economic activity like clockwork, with household expenditure dropping by 0.2% quarter on quarter.”

9.4% was a 40-year high for inflation in July, and it is anticipated to rise much further through the autumn.

The hospitality industry, among other consumer-facing industries, received some good news, but Kupelian predicted that these developments would pass quickly once the weather became chilly and travel demand decreased.

“The United Kingdom has entered a period of sluggish growth and rising inflation. The Bank of England has tightened financial conditions, so attention is now focused on policymakers to help mold the potential sources of future growth.

 

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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75.42% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. X