UK Economy Shrinks In July

The UK economy contracted in June on weaker out-turns in the services and industrial sectors, suggesting that the region is heading for a mild recession in the second half of the year.

Real gross domestic product fell 0.5 percent in July, offsetting June’s 0.5 percent increase, the Office for National Statistics reported Wednesday. The latest figure was also worse than economists’ forecast of 0.2 percent decline.

The main contributor to the fall in GDP was a 0.5 percent drop in services output, which had increased 0.2 percent in June.

Moreover, in contrast to the 1.8 percent rise in June, industrial production declined 0.7 percent on a monthly basis in July due to a decrease in manufacturing, electricity and gas and water supply and sewerage output.

Manufacturing posted a monthly fall of 0.8 percent, reversing June’s 2.4 percent increase. Output of electricity and gas fell 1.5 percent and water supply and sewerage slid 0.5 percent. Partially offsetting these decreases, mining and quarrying output gained 1.9 percent.

Construction output also fell in July, down 0.5 percent after rising 1.6 percent in June.

ING Economist James Smith said the economy is likely to more or less flatline over coming quarters – and a mild recession cannot be ruled out.

Bank of England officials have been clear that they are focused on wage growth, services inflation and labor market slack – and not a lot else, Smith said. The economist expects one more rate hike at next week’s meeting, before a pause in November.

Capital Economics’ economist Paul Dales said the strength of wage growth and the recent stickiness of core inflation suggest that the BoE will pull the interest rate trigger once more at the September meeting.

On a yearly basis, GDP registered no growth following a 0.9 percent rise in June, data showed. Economists had forecast an annual growth of 0.4 percent.

In the three months to July, GDP grew 0.2 percent with growth in all three sectors. This was a tad below the expected 0.3 percent expansion.

Separate data from the ONS showed that the UK visible trade deficit declined to GBP 14.06 billion in July from GBP 15.46 billion in June. The expected level was GBP 15.9 billion.

The surplus on services remained broadly unchanged at GBP 10.6 billion. As a result, the trade balance showed a shortfall of GBP 3.45 billion compared to a GBP 4.78 billion deficit in the prior month.

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