UK economy shrinks by more than expected in July

September 13, 2023

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UK economy shrinks by more than expected in July

The UK economy shrank more than expected in July, with the decline mainly driven by strike action across the service sector.

Wet weather also impacted the construction and retail industries, the Office for National Statistics stated, causing the economy to contract by 0.5%. These newly observed figures were worse than analysts had predicted and continue the trend of weak economic growth across the UK.

The decline seen in the economy for July was partly due to a fall in output from the services sector, which includes the NHS, with the ONS stating the drop was driven by resulting industrial action.

The figure produced by the ONS to show the health of the UK economy is known as gross domestic product. If the figure is increasing, it means the economy is growing and people are doing more work and getting wealthier on average.

But if GDP is falling, then the economy is shrinking which can result in detrimental impacts for businesses. If GDP falls for two quarters in a row, it is usually defined as an economic recession. The UK is currently not in recession, but there have been rising concerns over the economy's weak performance in recent months for many economists nationwide.

July's published economic figures could mean a mild recession has begun, it is also expected that the Bank of England will raise interest rates a final time from 5.25% to 5.5% in the near future. The Bank has been hiking rates in a bid to control the rate at which consumer prices in the UK have been rising.

Inflation fell to 6.8% in the 12 months to July, but the level is still more than three times the Bank's 2% target.

But with interest rates at the highest level for 15 years, the cost of borrowing including for loans such as mortgages has soared, although people with savings should benefit and get better returns on their money.

US inflation pressures remain stubborn as fuel prices continue to rise

Consumer prices in the US rose by more than expected last month, driven by higher costs for rent and fuel in particular.

The inflation rate was 3.7% over the 12 months to August, the Labor Department disclosed in its most recent report, up from 3.2% in July. The new figures underline the challenges facing officials trying to stabilise prices, which soared last year at the fastest pace in decades.

The inflation rate has dropped significantly from its peak last year. But analysts said the US central bank, which aims to keep inflation at 2%, is likely to remain concerned that the problem has not been resolved quickly.

The bank has already raised its benchmark interest rate to the highest level in 22 years, targeting a range of 5.25% to 5.5%, in a new effort to contain price rises.

It is due to meet later this month to consider whether further increases will be necessary. Wednesday's report showed fuel prices were the main driver of the jump in consumer prices from July to August. Monthly inflation was 0.6%, the highest since June 2022.

Stripping out food and fuel, where price swings are common, prices still rose by 0.3%, more than expected. Housing costs, which many analysts had expected to start cooling this year and make up a major part of the US consumer price index, also rose for the 40th month in a row.

Higher interest rates often cool the economy by encouraging saving and making it harder for households and businesses to take out loans to buy homes, expand operations and or spend on other items. In theory, price increases should ease as the economy slows, but the future remains uncertain.

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