The weather was hot but the economy was lukewarm. As temperatures in the UK rose above 40 degrees centigrade for the first time, growth in July remained tepid.
To be sure, the economy expanded, but some boost to activity was expected after the hit to growth in June caused by the double bank holiday to celebrate the late Queen’s platinum jubilee.
Given that gross domestic product – the official gauge of how big the economy is – contracted by 0.6% in June, the 0.2% bounceback in July was unimpressive, particularly given the boost provided by the Euro 2022 football tournament and the Commonwealth Games.
Over the three months to July, a better guide to the trend than one month’s figures taken in isolation, the economy moved sideways, showing zero growth.
The reason the post-lockdown recovery has petered out is simple: consumers are seeing their spending power reduced by rising inflation. According to the Office for National Statistics, while the economy as a whole is just over 1% bigger than it was pre-Covid 19 in early 2020, the output of consumer-facing services is 4.3% lower.
There was also some anecdotal evidence of people using less energy in July – in part due to the heatwave but also because higher prices affected demand for electricity and gas.
The economy shrank in the second quarter of 2022 and the weak start to the third quarter in July means a technical recession – defined as two consecutive three-month periods of falling output – is a distinct possibility. Activity in September will be affected by the extra bank holiday on the day of the Queen’s funeral next week.
Last week’s decision by the government to cap energy bills at an average of £2,500 has reduced the risk of economic meltdown over the winter, but the outlook remains poor. Manufacturing and construction contracted in July, and surveys suggest business confidence is low.
Capping energy bills means inflation will peak at a lower level than previously feared, but prices are still going to be rising faster than wages for some time to come. The Treasury and the Bank of England will be relieved if by next spring the economy is no smaller than it is now.
