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UK economy shrinks by 0.1% as cost-of-living crisis sets in

This decline compares to the first three months of this year when GDP actually grew by 0.8%.

The reduction was less than the 0.3% decline forecast by analysis, but it shows signs that rising inflation and the cost-of-living crisis are beginning to take hold in the UK.

The data revealed that in June alone the economy shrank by 0.6% as the extra bank holidays from the Jubilee distorted output, with an extra working day in May and two fewer in June.

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According to the ONS, the biggest contributor to the decline was a 0.4% drop in services.

Hussain Mehdi, macro and investment strategist at HSBC Asset Management, said: “UK growth is stagnating as the economy faces challenges from a severe real income squeeze amid elevated inflation and higher interest rates.

“In this backdrop, it will be difficult to dodge recession, especially with upside risks to energy prices heading into the winter.”

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George Lagarias, the chief economist at Mazars, said that with inflation running at 8% “many UK households have been in ‘recession’ long before official numbers can confirm it”.

He added: “Higher rates, higher prices and more taxes are suppressing consumption and sentiment. Yet, we are still far from the point where central banks would stop aggressive tightening.”

He said he expects to see economic pressures “to worsen in the near future, at least until prices begin to materially de-escalate and the Bank of England feels comfortable dialling back interest rates”.

Despite a dower outlook Mehdi remained bullish on UK large caps, as he expected them to “continue to outperform this year given exposure to commodity, value and defensive names”.

Chirag Shah, CEO and founder of Nucleus Commercial Finance, said that the challenge for UK businesses over the next three to five years would be attaining necessary financial support.

“One in five smaller businesses (16%) and more than a quarter of medium sized businesses (27%) identify challenges in securing lending as a key factor in the UK’s ‘investment gap’ compared to EU companies.

“Going forward, it is key there are structured solutions with more medium to long term impact in mind, not just short-term fixes.

“Now, more than ever before, planning what financial support UK businesses need over the next three to five years is a must. Making it up as we go along is not a viable option.”

 

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