UK economy shrinks at fastest pace in seven months, hit by strikes and wet weather

LONDON — U.Ok. gross home product fell by 0.5% in July, under the 0.2% contraction forecast in a Reuters ballot of economists.

Services output was the principle drag, the Office for National Statistics said, declining 0.5%. The economy put in a better-than-expected efficiency for the second quarter as an entire, with the ONS reiterating its studying of 0.2% progress. July’s shock dip meant the economy shrank at its fastest pace since December, in accordance with ONS figures.

It is the most recent signal of financial pressure in the higher interest rate environment. On Tuesday, figures confirmed U.Ok. mortgages in arrears jumped to a seven-year excessive in the three months to June.

Major funding banks trimmed their U.Ok. progress expectations following the studying. Goldman Sachs revised its annual progress forecast to 0.3% from 0.5% and JP Morgan downgraded to 0.4% from 0.6%, Reuters reported.

However James Smith, developed markets economist at ING, mentioned in a observe that “chopping by means of the noise, the economy appears to be nonetheless rising, albeit fractionally.”

“We assume the economy is more likely to roughly flatline over coming quarters – and a gentle recession cannot be dominated out,” he mentioned.

Paul Dales, chief U.Ok. economist at Capital Economics, mentioned the GDP figures might point out a gentle recession has already begun and “underlying progress has misplaced momentum since earlier in the yr.”

Dales highlighted strikes and unusually wet weather as weighing on sure sectors, however mentioned output declined extra broadly, suggesting widespread weak point.

“Even so, with wage progress nonetheless uncomfortably robust, we suspect the Bank of England will nonetheless elevate rates of interest one ultimate time subsequent week, from 5.25% to five.50%,” Dales mentioned.

A possible concern for the central financial institution got here Tuesday, when knowledge confirmed annual progress in pay excluding bonuses remained regular at 7.8%, the best on document. This was mixed with an indication of slight cooling in the labor market, as unemployment rose 0.5 share factors.

The British pound was 0.2% decrease towards the U.S. dollar at $1.245 at 8:40 a.m. London time Wednesday, because it additionally declined towards the euro.

Jane Foley, head of FX technique at Rabobank, mentioned the BOE confronted a “troublesome predicament” given robust earnings knowledge and slower U.Ok. progress.

“While the market is assuming {that a} September fee hike is a executed deal, the uncertainty for following conferences is rising. Clearly an excessive amount of tightening would danger a U.Ok. recession and this risk seems somewhat stronger after at this time’s month-to-month GDP report,” she mentioned by way of e-mail.

“Weaker progress knowledge thus will increase the probabilities that Bank fee will attain its peak this month – an outlook which is weighing on the pound this morning.”