ONS GDP data: Economy expands 0.2% in July despite deepening cost-of-living squeeze

Alice Haine, Personal Finance Analyst at Bestinvest, the DIY investment platform and coaching service, comments:

“Flattening economic growth in the three months to July was to be expected when you consider the immense challenges the country was facing as the fallout from the war in Ukraine and rising borrowing costs took its toll on the economy. The resulting rises in food, fuel and energy prices sent inflation soaring to a 40-year-high of 10.1% in July and forced households and businesses to reevaluate their expenditure.

“Despite this, there was slight GDP growth of 0.2% in July driven by the services sector, with the UK’s decision to host the Women’s Euro Championship and the Commonwealth Games delivering a positive boost to output. However, the production and construction sectors contracted in July - a reflection of the shifting economy as Britain really started to grasp the sheer scale of the energy crisis and the fact that price rises were not going to reverse any time soon.

“With warnings already in place that a very difficult winter lay ahead, it is only natural that demand was being constrained as households adjusted budgets and attempted to stockpile cash to prepare their finances.

“Just a week ago, the outlook for the winter seemed dire as gas and electricity bills were set to rise 80% from October 1 in line with the energy price cap – and jump again in January – with inflation potentially peaking above 22% at the start of 2023.

“However, this scenario was averted when new Prime Minister Liz Truss unveiled her energy plan last week with the decision to freeze annual energy bills at £2,500 for the typical household this winter and next providing household budgets with some respite.

“While this move won’t remove all the pain for household finances in the near term as energy prices remain significantly higher than a year ago and some people’s finances are already creaking under the strain – it will avert what would have been an extremely difficult situation for many households and a deep recess.

“With the two-year freeze in energy bills saving households £1,000 a year, the UK is expected to suffer a much milder recession than previously forecast, with inflation likely to peak in the fourth quarter several percentage points lower than feared.

“While the Bank of England is still expected to increase the base rate at its next Monetary Policy Committee meeting – which was delayed until September 22^nd following the sad death of Queen Elizabeth II - it is hopeful that runaway inflation will be contained.

“However, what happens from here in terms of rate rises is unclear. While there was expectation the BoE might vote for an increase of up 0.75% before the energy plan announcement - the biggest rise since 1992 - some quarters expect that strategy to remain unchanged. This is because the new Government’s fiscal stimulus measures, including tax cuts, also have the potential to stimulate the economy at the very point that the BoE is trying to curb inflation – meaning higher rates could stay in place for longer.”