UK GDP falls 0.5 per cent as interest rate hikes continue to bite

In July 2023, the monthly real GDP is estimated to have fallen, with falls in all three main sectors, following growth of 0.5 per cent in June 2023.

Industrial action took its toll on the services sector with output also falling in the construction and production sectors and the wet weather hitting retail output - a sharp contrast to the 0.5 per cent expansion in June when hotter temperatures led to more buoyant growth.

Alice Haine, personal finance analyst at Bestinvest, an ivestment platform and coaching service, said: "With the weather able to deliver such a dampening effect on output, the UK must brace itself for further storms as the UK heads into the colder autumn and winter months.   

 “The summer of 2023 has certainly been one of contrasts with the warmest June on record followed by a dismally wet July – something reflected in the latest GDP data."

Sticky inflation

Haine said that despite fears of a recession, Britain’s economy had remained resilient so far this year, despite multiple threats posed to output by rapidly rising interest rate hikes, sticky inflation, persistent industrial action and the cost-of-borrowing crisis.

She said: "The road ahead looks less forgiving, however, with interest rates now at their highest level in 15 years and expected to jump again by 25 basis points when the Monetary Policy Committee meets again later this month – a move designed to constrain demand and expenditure in the economy."

The UK economy still has a number of battles to overcome, added Haine.

"Top of the list is inflation. While 14 interest rate rises from the BoE are having the desired effect of bringing rampant CPI inflation down to a slightly palatable 6.8 per cent in the 12 months to July, compared to the high of 11.1 per cent in October last year, the worst may not be over.

"Workers are enjoying record earnings growth with real pay, adjusted for inflation, in positive territory again - great news for consumers but less so for businesses who must shoulder higher staffing costs along with a raft of other cost pressures."

There are also hints of trouble in a softening labour market, with unemployment edging up to 4.3 per cent in the May-to-July period and vacancies falling below a million for the first time in two years as companies put hiring and expansion plans on hold. 

With many household budgets still under significant strain, it remains to be seen if the improving weather conditions in August and mini heatwave in September will deliver an uplift in economic output.

"But as the colder weather draws in, households should protect their finances from any further shocks by drawing up a solid budget, constraining expenditure and boosting their rainy-day fund now to ensure their finances survive any surprise storms ahead.” 

Interest rate rises

Marcus Brookes, chief investment officer at Quilter Investors said the UK economy was buckling under the strain of repeated interest rate increases.

"Unfortunately the news shows just how complex and challenging the country's economic landscape still is."

"The Bank of England's governor, Andrew Bailey, weighed in recently signifying that interest rates are nearing their peak, especially after a 14th consecutive hike that saw them rise to 5.25 per cent last month. Although this offers some respite to homeowners and the housing market, which has been grappling with high mortgage rates, the broader economy still remains under serious pressure illustrated by today’s lacklustre GDP figure.

"One positive that has emerged in recent weeks are revelations from the Office for National Statistics that the UK's economic recovery post-pandemic seems to have been stronger than initially reported.

"Notably, 2021's GDP growth saw an upward revision, revealing an 8.7 per cent increase. This data suggests that by the time the Omicron variant emerged, the UK's economy was already 0.6 per cent above its pre-Covid mark, contrary to the previously believed 1.2 per cent deficit."