The economy is contracting – with Jubilee partly to blame

The UK economy contracted by 0.1% in the second quarter, according to official estimates.

It follows a positive first quarter, in which the economy grew by 0.8%.

Last week, the Bank of England predicted that the UK would fall into recession by autumn and could see more than a year of economic contraction later.

Although there was some growth in April, May and June in service businesses such as travel agencies with the lifting of COVID-19 related restrictions, the end of the test and trace initiative has dealt a severe blow to the economy.

“Healthcare was the main reason the economy contracted as test and trace and vaccination programs were halted, while many retailers also had a difficult quarter,” said Darren Morgan , director of economic statistics at the Office for National Statistics.

“These were partially offset by growth in hotels, bars, hairdressers and outdoor events during the quarter, in part due to people celebrating the Platinum Jubilee.”

There was a sharp drop of 0.6% in June, partly because of the significant reduction in spending on services with the phasing out of coronavirus testing and tracing, and partly because the Platinum Jubilee meant that there were two less working days that month.

The UK’s economic performance was worse in the second quarter than countries such as Canada, Italy, France and Germany, with underlying data showing economic pressures were beginning to weigh on spending of consumption.

Private consumption fell 0.2% in the second quarter, indicating that record prices for some products kept people from spending.

But it’s too early to say the UK is in recession, according to KPMG.

“It’s too early to call a recession despite falling output,” said Yael Selfin, chief economist at KPMG UK.

“Households are already battered by rising inflation, which is weighing on real incomes, while rising interest rates are making mortgage servicing less affordable,” Ms Selfin said.

Nadhim Zahawi, the chancellor, told Sky News he rejected the idea that the government had been asleep at the wheel throughout this crisis and blamed Russian President Vladimir Putin for record energy prices.

‘I don’t recognize that,’ he said, pointing to an existing support package which includes a £400 cut on the energy bill for all households.

But Mr Zahawi declined to say more direct help to struggling families would be inevitable this winter.

“We are looking at all the options for additional support that we can provide to families,” he said.

On taxing the profits of energy companies, Mr. Zahawi said: “There are no easy answers to this…every decision is a difficult decision.

The latest data comes after dire forecasts by the Bank of England of a 15 month recession – five consecutive quarters of economic contraction.

Speaking after the Bank raised interest rates by 50 basis points (0.5%) this month in a bid to tackle the highest rate of inflation in more than 40 years, the Governor Andrew Bailey said GDP would likely fall to 1.25% in 2023 and 0.25% in 2024.

If this forecast is confirmed, it would be the first example of two years of annual economic contraction since the 1960s.

But Ms Selfin said KPMG was not as pessimistic as the central bank.

“We expect a slightly shorter and milder recession than the one announced by the Bank of England last week,” she said.

“The main difference stems from our view that energy prices will eventually fall, contributing less to inflation, while the Bank’s forecast means prices will remain high for the next three years.”

People are facing massive increases in energy bills, with consultancy Cornwall Insight predicting the price cap is should come in at around £3,582 a year for the average household from October.

This is an increase from the £3,359 expected earlier this monthand compares to last October’s price cap of £1,277.

Sky News

(c) Sky News 2022: The economy is contracting – with Jubilee partly to blame

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