UK economy shrinks amid recession predictions, with GDP down 0.1%

GDP fell by 0.1% between April and June, according to the Office for National Statistics - a big drop from GDP rising 0.8% in the previous quarter. This growth was largely down to spending on Test and Trace and the vaccine programme, analysts say.

The fall in GDP may not be the start of a recession – which is defined as two quarters of GDP decline – but experts believe there is one coming this year.

“While we see increasing signs of underlying weakness in the economy, we expect a more severe downturn to take place only from towards the end of this year,” said Yael Selfin, chief economist at KPMG UK.

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The downturn is likely to start next quarter after Ofgem hikes the price cap on energy bills in October by an estimated 84% to £3634, according to the latest predictions.

The Bank of England has predicted that the economy will shrink in the final quarter of this year and then every quarter in 2023.

The most recent drop came as GDP shrank by 0.6% in June, and growth estimates for May were revised down from 0.5% to 0.4%.

The ONS said that the phasing out of spending on fighting Covid-19 was partly to blame for the contraction over the quarter.

“Health was the biggest reason the economy contracted as both the Test and Trace and vaccine programmes were wound down, while many retailers also had a tough quarter,” said director of economic statistics Darren Morgan.

TUC general secretary Frances O’Grady commented: “Under the Conservative government’s current plans, the Bank of England says that we are heading for a recession.

“Ministers must do much more to get pay rising. We need an early boost to the minimum wage this autumn and pay rises across the public sector that keep up with inflation. This will help protect demand and business confidence.”

And SNP shadow chancellor Alison Thewliss said the economic figures are evidence that independence is the only option available to keep Scotland safe "from the damage of Westminster control".

"Households up and down the country face poverty and destitution, and businesses - not subject to the energy cap - risk folding as the cost of living crisis spirals out of control," she said. "The last thing we need at this time is an unemployment crisis. Yet the Tory government continues to prioritise the leadership race instead of supporting people and businesses with sky-high bills.

“Successive Westminster governments have created a situation whereby the UK is lagging behind other countries - with the worst growth, productivity, poverty and inequality of our European neighbours."

Chancellor of the Exchequer Nadhim Zahawi said as the economy had got through Covid, it can get through other "global challenges".

This is despite energy bills in the UK going up by around 215%, while the average European increase is 41%. Countries like France, with nationalised energy systems, have been able to limit price rises to just 4%.

“I know that times are tough and people will be concerned about rising prices and slowing growth, and that’s why I’m determined to work with the Bank of England to get inflation under control and grow the economy.

But on Thursday Zahawi and Prime Minister Boris Johnson refused to take any fiscal action after meeting with bosses of the UK’s biggest energy companies.

Following the meeting they re-iterated the support on bills, which was announced months ago when the October price cap was predicted to reach just £2800 in October.

The latest predictions show the cap rising nearly £900 more than that in October, and passing £5000 in April.

Any new support will have to be decided by the new prime minister, who will not be in place until early September, the Government said.

The cap rise is adding to inflation fears, with consumer price index inflation expected to top more than 13% in October, according to the Bank of England.

And British Chambers of Commerce head of research David Bharier warned that businesses are also being hit by these growing costs.

“Since 2021, our research has been flagging the damaging impact of inflation, it is wiping out many firms’ profit margins and threatening their long-term growth,” he said.

“Supply constraints caused by global Covid lockdowns and conflict in Ukraine, coupled with soaring energy costs, have created a perfect storm that many small businesses are struggling to weather.”

He added: “That’s why it is becoming critical for the Government to take action as soon as possible. They must immediately cut the VAT on businesses’ fuel bills to 5%. The longer the economy is left to drift towards the danger zone the harder it will be to rectify.”