UK economy grows less than expected in July

The UK economy returned to growth in July, but this was weaker than expected as industrial production and construction shrank, according to figures released on Monday by the Office for National Statistics.

GDP rose 0.2% following a 0.6% decline in June, coming in below economists’ expectations of 0.5% growth.

The services sector was the main driver of the rise in GDP, with growth of 0.4% in July, up from 0.5% the month before.

Meanwhile, production contracted by 0.3% following a 0.9% decline in June, mainly due to a fall of 3.4% in electricity, gas, steam, and air conditioning supply. Construction fell 0.8% in July following a 1.4% contraction the month before. This came solely from repair and maintenance, which fell 2.6%.

This marked the second consecutive contraction for production and construction.

The ONS said monthly GDP is now estimated to be 1.1% above its pre-Covid level in February 2020.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: "Looking ahead, the extra public holiday for the Queen’s funeral on September 19 has the potential to be more damaging for the economy than the extra day off for the Jubilee in June, as the hospitality and tourism sector likely won’t benefit, but many businesses still will shut. That said, many businesses will be able to catch up work, as most of them did in June. Similar events in the past also had minimal impact on consumers’ confidence and their spending decisions.

"For now, then, we’re pencilling in a 0.2% hit to the level of GDP in September from the funeral. That suggests that a technical recession - widely defined as two quarters of declining GDP- is hanging in the balance, given that business surveys have weakened since July and are consistent with GDP merely holding steady in Q3. Nonetheless, households’ real disposable incomes likely will recover over the coming quarters, now that the government has capped energy prices, maintained previously announced grants, and likely will reverse April’s National Insurance hike soon."

Tombs said the main threat to the economic outlook now comes from an excessive tightening of monetary policy. However, he believes the MPC "will see sense soon", as labour market slack builds and the run rate of core price rises slows, as suggested by leading indicators.

"Accordingly, we continue to think that a recession will be narrowly avoided over the coming quarters," he said.