The UK Is Flirting With Recession

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What's going on?

Data out on Friday showed the UK economy shrank less than expected in the second quarter.

What does this mean?

The UK economy shrank 0.1% last quarter compared to the one before, but it could’ve been worse: economists were expecting twice that, at a time when every increment matters. That marks the first contraction in the economy since the height of the pandemic, and it was down to a domino effect of factors. High inflation has been stoking the cost-of-living crisis, which has left Brits with less disposable income to spend out and about. That, in turn, led to a drop in household consumption (partly reflected in weak retail sales), and a drop in manufacturing. It’s also worth bearing in mind that there was one day less of business, with Brits given a day off to celebrate the Queen’s Platinum Jubilee. So when you put it all together, less shrinkage than expected was actually something of a win.

Why should I care?

For markets: You can relax. 

You need two quarters of contraction in a row for an economy to officially be in a recession, and Bloomberg Economics doesn’t think that’ll happen just yet. After all, Brits don’t have a royal day off this time around, which means the economy – measured relative to the quarter before – has an extra day to boost its numbers. And even if there is a downturn, it’s not the end of the world: the US is technically in a recession, but investors seem to have shrugged it off.

The bigger picture: You can stop relaxing now. 

The UK might avoid a recession this year, but the Bank of England (BoE) thinks it’s bound to arrive in 2023 (tweet this). The central bank puts that down to – what else? – inflation, which it thinks will peak at around 13% in October on the back of rising energy prices. Then again, the UK energy regulator’s latest data suggests the BoE is still underestimating energy costs, which arguably means it’s still underestimating inflation too…

Originally posted as part of the Finimize daily email.

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