The UK economy shrank in July by 0.5% amid industrial action and extremely wet weather, official figures indicate, heightening fears of a recession in the second half of the year.
Analysts expected gross domestic product (GDP) to fall back by 0.2% but the Office for National Statistics said that strikes by junior doctors reduced health service activity, while retailers who had benefited from a warm June suffered in July, which was the sixth wettest on record.
However, the falls in output went beyond those sectors affected by strikes and rain, with all three major sectors – manufacturing, services and construction – contracting for the first time since the summer of last year.
Analysts at the consultancy Capital Economics warned that the UK might already be in recession. The chief UK economist, Paul Dales, said July’s drop would mean the Bank of England’s forecast of 0.4% growth in the third quarter of the year was unlikely to be met.
Nevertheless, he forecast that strong wage growth and sticky core inflation meant Bank policymakers would again raise the base interest rate from its current level of 5.25% when they meet on 21 September. Markets expect rate-setters to push up that figure by 0.25 percentage points to 5.5%.
Figures released on Tuesday showed the labour market weakening after an increase in unemployment and a fall in vacancies, but average wage rises excluding bonuses were above the 6.8% inflation rate at 7.8%.
The shadow chancellor, Rachel Reeves, said the latest GDP figures were “dismal” and showed “the British economy remains hostage to the Conservatives’ low growth trap that is leaving working people worse off”.
The Treasury said it expected the strikes, which also hit the education sector, and the bad weather to play a part in dragging down the economy, adding that there were reasons for optimism.
Jeremy Hunt, the chancellor, said: “Only by halving inflation can we deliver the sustainable growth and pay rises that the country needs.
“But there are many reasons to be confident about the future. We were among the fastest in the G7 to recover from the pandemic and the IMF have said we will grow faster than Germany, France, and Italy in the long term.”
Business groups said their members were braced for a difficult autumn and winter coping with high interest rates and falling consumer demand.
The Institute of Directors said the contraction of computer and IT services was an omen of cuts to business investment by companies worried about the prospect of a recession.
Computer programming, consultancy and related activities fell by 3.4% in July after three consecutive months of growth in April, May, and June.
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Manufacturing contracted by 0.8%, while construction dipped by 0.5%, partly wiping out a 1.6% expansion in June. Services output, which accounts for about three-quarters of private sector activity, fell by 0.5% in July, after growth of 0.2% in June.
Martin McTague, the national chair of the Federation of Small Businesses, said: “This fall in GDP will come as little surprise for small businesses, who have endured uncertain trading conditions over a summer marked by poor weather and still-high levels of inflation.
“It is disheartening to see a fall in the three main sectors of services, construction, and production, with the fall in services especially eye-catching due to the dominance of the service sector in the UK economy.”
GDP was estimated to have grown by 0.5% in June, after a fall of 0.1% in May 2023 and growth of 0.2% in April 2023.
Earlier this month, GDP growth in 2020 and 2021 was revised upward, meaning GDP was estimated to be 0.6% above pre-coronavirus pandemic levels in the last three months of 2021, having been previously estimated as 1.2% below.