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UK economy closes in on recession as it shrinks in second quarter

LONDON (REUTERS) – Britain’s economy contracted by less than feared in June, when public holidays had been expected to exert a big drag, although sectors most exposed to a worsening cost-of-living crisis, such as retail and restaurants, struggled.

Output for the second quarter as a whole still contracted, however, with Britain expected to enter a long downturn at the end of the year in the face of surging inflation and rising interest rates.

The Office for National Statistics said gross domestic product (GDP) fell by 0.6 per cent in June, the biggest contraction since January 2021 but less severe than the 1.3 per cent drop predicted by a Reuters poll of economists.

The month unusually contained two bank holidays to celebrate Queen Elizabeth’s Platinum Jubilee.

“It’s impossible to tell whether this reflects a smaller than usual hit from the Jubilee, or evidence that the economy has considerable underlying momentum,” said consultancy Pantheon Macroeconomics economist Samuel Tombs.

Either way, he said, GDP is likely to rebound in July.

The one-off bank holidays in June subtracted two working days from the month and the winding down of coronavirus-related health services also dragged on GDP in June.

Friday’s (Aug 12) data also pointed to growing weakness among consumer-facing sectors of the economy as Britons deal with inflation reaching a 40-year high in the wake of the war in Ukraine.

The economy was estimated to be 0.9 per cent above its pre-Covid-19 pandemic level in February 2020 but consumer-facing services output was 4.9 per cent below.

Finance Minister Nadhim Zahawi said the figures pointed to “real resilience” in the private sector, but many economists expect a slide into recession.

Last week, the Bank of England predicted Britain would enter a recession at the end of 2022 and not emerge until early 2024 as it raised interest rates to battle inflation, which it said was likely to exceed 13 per cent in October.

For the second quarter as a whole, the ONS said the economy contracted by 0.1 per cent, compared with forecasts for a 0.3 per cent drop.

Britain has lagged behind the United States, Italy and France in the recovery from the Covid-19 pandemic, comparing second quarter economic output against late 2019. Germany, however, has fared worse.

“The UK economy is sliding closer to recession and the worst is yet to come,” said Mr Suren Thiru, economics director of the Institute of Chartered Accountants in England and Wales.

Separate ONS data showed Britain’s goods trade deficit swelled in June to £22.85 billion (S$38 billion) as exports to the European Union and the rest of the world cooled.