UK GDP: Strikes drag down GDP, but consumers focused on having fun

The UK economy shrank by 0.5% in July, completely reversing June’s 0.5% rise. At face value, this suggests that the economy is losing momentum. However, more than half the drop was related to strike action. Meanwhile, consumers focused on entertaining themselves, and their kids, during the exceptionally wet July meaning that output in the arts entertainment and recreation sectors soared, no doubt helped by the release of Barbenheimer. 

The big picture is that growth is still flat lining. We expect the economy to continue to stagnate for the rest of the year, but there is a growing risk of a recession towards the end of this year or early 2024. This would support the Monetary Policy Committee (MPC) pausing after a 25 basis points hike next week. 

Behind the data  

GDP was dragged down by strike action in the health and education sectors in July, where output fell by 2.1% month-on-month (m/m) and 1.1% respectively. Similarly, rail strikes dragged down transport output by 1.6%. The manufacturing sector gave back some of its massive 2.4% gains from June falling by 0.8% in July and construction dropped by 0.5% m/m, no doubt hampered by the wet weather. 

However, output in the arts entertainment and recreation sector soared by 6.6%. Sports activities, and amusement and recreation activities grew by 12.4% and creative, arts and entertainment grew by 4.9% as consumers turned to entertainment activities to escape the wet weather.

But the weakness can’t all be blamed on strikes and the weather. Output declined in 11 of the other 16 sectors, pointing to a weakening in growth. That would make sense given that the dampening effect of higher interest rates should be starting to be felt a bit harder now. 

Where next? 

The economy is still likely to eke out some meagre growth in Q3 as fewer strikes and a return to more normal weather boost output in the remaining two months of the quarter. While our baseline view is that the economy will just avoid a recession, we are expecting meagre growth of about 0.1% a quarter over the next year. But, it wouldn’t take many more readings like today’s data to tip the economy into recession. 

For the Bank of England, growth is now on track to come in materially below its Q3 forecast, which was for a 0.4% gain. We don’t think that will influence the central bank’s policy decision at its next meeting on September 21, as the strength of domestic price pressure should push it toward another hike. Softer economic data should mean that the MPC feels it can then press pause on its rate hike campaign.