In the second quarter of 2022, as the country’s cost-of-living crisis took hold, the U.K. economy shrank.
Gross domestic product (GDP), according to official data released on Thursday, shrank by 0.1% quarter over quarter in the second three months of the year, 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 will likely experience its longest recession since the global financial crisis in the fourth quarter, the Bank of England warned last week. Meanwhile, a peak in inflation above 13% is anticipated for October.
According to monthly estimates, GDP contracted by 0.6% in June, which was less than the 1.3% consensus forecast but still declined from a revised 0.4% expansion in May.
Hussain Mehdi, macro and investment strategist at HSBC Asset Management, stated that the U.K.’s growth is stagnating as the country’s economy struggles with a severe real income squeeze in the midst of rising inflation and higher interest rates.
It will be challenging to avoid recession against this backdrop, particularly given the potential increase in energy prices as winter approaches.
HSBC predicts that large-cap U.K. equities will outperform this year despite macroeconomic headwinds because of their “exposure to the commodity, value, and defensive names.”
The Office for National Statistics, which releases the growth figures, claimed that the contraction was primarily caused by a drop in service output, with health and social work activities, which reflect a decline in Covid-19 activities, acting as the biggest drag.
In the second quarter, household consumption fell by 0.2%, but this was countered by a boost from net trade, according to the report.