The British economy contracted slightly in the second quarter, losing momentum as the country experiences a deepening cost-of-living crisis and economists predict that a recession will start later this year.
Gross domestic product fell 0.1 percent in April to June compared with the previous quarter, when the economy grew 0.8 percent, the Office for National Statistics reported on Friday. The biggest drag on growth in the second quarter was a reduction in health services as pandemic measures, such as coronavirus testing and vaccine administering, declined. This was only partly offset by growth in consumer-facing services, such as travel agencies, restaurants and hotels, and spending related to the Queen’s Platinum Jubilee.
Britons are facing a bleak combination of stagnant or declining economic growth with one of the highest inflation rates among its rich-economy peers. In June, inflation climbed to 9.4 percent, the highest in 40 years, but isn’t expected to peak until it reaches 13 percent in October. The Bank of England, which has been steadily raising interest rates since December in an effort to restrain rapid price rises, predicted last week that the country would enter a long recession at the end of the year, which it wouldn’t exit until the beginning of 2024.
High inflation is squeezing household budgets and is expected to lead to a sharp decline in consumer spending, normally a major driver of economic growth, while soaring energy prices also constrain businesses. Household incomes, adjusted for inflation and taxes, are predicted to fall sharply this year and next, in the worst decline in records dating back to the 1960s, the central bank said.
British households are bracing for unsettlingly high energy bills in particular. In October, when the government price cap is reset, it could be 3,500 pounds ($4,256) per year, three times the amount a year ago. But the effects of high inflation can already be seen: In the second quarter, consumer spending, once adjusted for price increases, fell 0.2 percent.
Warnings about low growth and high inflation are ringing across the globe. The International Monetary Fund said late last month that the world may soon “be teetering on the edge of a global recession.”
The U.S. economy also shrank in the second quarter, following a decline in the first quarter, setting off a debate about whether the country was already in a recession.
The lingering effects of the pandemic and the economic consequences of Russia’s invasion of Ukraine are evident in the British economy. In the second quarter, growth was dragged down by a decline in wholesale and retail business activities, with companies reporting that they were still hampered by supply chain disruptions and a drop in retail sales as people cut back on spending to cope with the rising cost of living.
The National Institute of Economic and Social Research, a think tank in London, argues that the British economy is already in a recession. This underscores the scale of the challenge facing the contenders to be the next prime minister, in a contest that concludes next month. Rishi Sunak, the former chancellor of the Exchequer, and Liz Truss, the foreign secretary, have clashed over the best approach to provide support for more households, through tax cuts or direct payments, as Britain’s economic outlook turns gloomier.