The UK economy has shrunk more than expected for the month of July. As per the Office for National Statistics (ONS), after a 0.5% gain in June, the country’s GDP (Gross Domestic Product) shrank by 0.5% in July. This is the biggest drop since December 2022. Economists, on the other hand, had expected the economy to shrink by 0.2%. The British economy is now the fastest-shrinking economy in the last seven months.
According to Paul Dales, chief UK economist at Capital Economics, “The decline in GDP in July suggests that underlying growth has lost momentum since earlier in the year.”
The biggest cause of the contraction was a 0.5% dip in the services sector in July. The monsoon weather may have also played a role in people not engaging in such activities. There was also a decline in construction and industrial production, as well as in the information and communication sector.
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The pound sterling was down 0.4% against the dollar at $1.2449. On the other hand, the euro gained 0.2% against it. The UK’s failing economy is bad news for Prime Minister Rishi Sunak, who might face general elections next year. His Conservative Party is currently far behind the opposition Labour Party in the opinion polls.
With its economy failing, will the UK raise interest rates again?
Dales noted that the dampening effect of higher interest rates is beginning to be felt harder right now. However, the latest data might prompt the Bank of England (BoE) to raise rates once again later this month. The BoE has raised rates 15 times since December 2021. Current borrowing rates are at 5.25%, the highest in 15 years.
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Money market traders predict a 75% chance of another rate hike. Meanwhile, 25% predict that the BoE will hold its current interest rate. Chancellor of the Exchequer Jeremy Hunt, however, believed that the UK is doing better than other countries. Hunt stated,
“There are many reasons to be confident about the future. We were among the fastest in the G-7 to recover from the pandemic, and the IMF has said we will grow faster than Germany, France, and Italy in the long term.”