UK economy shrinks more than expected in July due to strikes and wet weather

Gross domestic product fell by 0.5 per cent in the sharpest contraction since December last year

A pedestrian braves the rain on London's Waterloo Bridge. July was a weaker month for construction and retail due to poor weather. Getty Images
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The UK economy shrank more than expected in July as continuing strikes and wet weather stifled growth.

Data showed that gross domestic product fell by 0.5 per cent in the sharpest contraction since December last year.

Economists had been expecting a 0.2 fall for the month, following a 0.5 per cent monthly increase in June.

The Office for National Statistics said the “broader picture looks more positive” despite July’s decline.

“Our initial estimate for July shows that GDP fell; however, the broader picture looks more positive, with the economy growing across the services, production and construction sectors in the last three months,” said the ONS director of economic statistics, Darren Morgan.

“In July, industrial action by healthcare workers and teachers negatively impacted services, and it was a weaker month for construction and retail due to the poor weather.

“Manufacturing also fell back following its rebound from the effect of May's extra bank holiday.”

The ONS said all three key areas of the economy – services, construction and production – declined in July.

Lower activity in the service sector was the biggest driver of the latest monthly slump, according to the statistics body.

It said the human health and social work activities sector recorded a 2.1 per cent contraction for the month as a result of industrial action by NHS senior doctors and radiographers, as well an increase in strike days by junior doctors.

The education sector also recorded a 1.1 per cent fall for the month, as the sector was impacted by two days of strikes.

Elsewhere, the retail and accommodation sectors also dipped as consumer sentiment was held back by poor weather.

However, the arts and entertainment industry had a stronger month because of a busy schedule of sporting events and “increased theme park visits”.

Chancellor Jeremy Hunt 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 International Monetary Fund has said we will grow faster than Germany, France and Italy in the long term.”

However, Labour's shadow chancellor Rachel Reeves said the release of the data was "another dismal day for growth".

Alice Haine, Personal Finance Analyst at Bestinvest, the DIY investment platform and coaching service said Britain’s economy has remained resilient so far this year, despite multiple threats.

"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," she added.

Craig Erlam, Senior Market Analyst at OANDA said it is doubtful whether the data will "sway" the Bank of England when it meets next week to discuss interest rates, particularly against the backdrop of strong wage growth, as was reported yesterday.

"Markets are now pricing in a rate hike at around 75 per cent, which seems overly cautious to me but then, perhaps Andrew Bailey's words last week are continuing to ring in the ears of traders.

"The Governor and his colleagues indicated the discussion will be more balanced than people seem to think which suggested a hold is very much on the table this month.

"That seems a little far-fetched at this stage and I think the words are probably intended for a little further down the line in November but then it wouldn't be the first time the BoE has surprised us. That said, it also wouldn't be the first time they've hinted at something and not followed through."

Updated: September 13, 2023, 3:04 PM