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�