UK GDP contracted in August, down 0.3%, as fortunes reversed from a shock rise in July, according to the Office for National Statistics.
It leaves the UK economy just 0.5% above its pre-Covid levels, with the production sector (including manufacturing, mining, gas and water) the main source of the most recent fall. This was down 1.8% in August, while there was a 1.6% fall in manufacturing specifically.
George Lagarias, chief economist at Mazars, said the August contraction was faster than expected, noting that there was more bad news as the July figures were adjusted lower from 0.2% to 0.1%.
“We believe that we are at the beginning of the recession cycle, not the end. Economic activity may well remain lacklustre well into the next year and could be further exacerbated if the Bank of England hikes rates too aggressively to defend the pound,” he said.
Contributions to monthly UK GDP growth, Aug 2021 to Aug 2022
Source: Office for National Statistics
All eyes will turn to the Bank, which has an unenviable task of trying to raise interest rates to stem inflation while not collapsing the economy.
Marcus Brookes, chief investment officer at Quilter Investors, said the latest figures were not encouraging, but would be unlikely to make much of a difference to the path we are already on.
“The Bank of England will continue to increase its base rate at it battles to tame runaway inflation. It continues to face the incredibly difficult task of guiding the country through this uncertain period where it finds itself in a rock and a hard place by raising rates to meet inflation but embarking on a gilt buying operation to help steady the markets following the turmoil precipitated by the mini-Budget.”
However, the central bank’s policies are seemingly at loggerheads with the government, which is prioritising stimulating growth through tax cuts and fiscal intervention than worrying about price rises.
“Whether the Conservatives stance against the so called ‘anti-growth coalition’ actually ends up producing growth is yet to be seen. What is likely though is that due to a combination of rising mortgage bills, higher energy bills and ever-increasing inflation the next few months will prove difficult for everyone including government, businesses and households,” Brookes added.
Things could get worse however in the September reading, which will include the interest rate hike from the Bank of England, the mourning period after the Queen’s death and the chancellor’s disastrous mini-Budget.
For investors, Brookes noted that a lot of the bad news is already priced into the market, with a little extra volatility already added for good measure.
“The biggest risk, therefore, is that investors flee from the market at just the wrong time and miss out on the opportunities that volatile times bring,” he said.