In Focus: Fixed income  

GDP rises 0.2% easing immediate recession fears

GDP rises 0.2% easing immediate recession fears
  Services output grew by 0.4 per cent in July after falling 0.5 per cent in June

The UK economy returned to growth in July due to a rise in services, easing fears that a recession is on the immediate horizon.

Gross domestic product grew 0.2 per cent in the month, after contracting 0.6 per cent in June, according to the Office for National Statistics.

GDP has remained flat in the three months to July, compared with the previous three months.

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Services output grew by 0.4 per cent in July after falling 0.5 per cent in June. The ONS dubbed this growth “the main driver” to the rise in GDP.

Meanwhile, construction fell by 0.8 per cent, and product by 0.3 per cent.

Monthly GDP is now estimated to be 1.1 per cent above its pre-coronavirus levels.

“Rather surprisingly UK growth bounced back in July after a disappointing figure in June, easing concerns that a recession is on the immediate horizon,” said chief investment officer at Quilter Investors, Marcus Brookes.

Brookes said July’s positive growth in services was boosted by the Women’s Euros and the Commonwealth Games.

But he warned that the outlook could be “bleaker”, given the data is from July and comes before a potential slowdown in activity across the UK due to a period of mourning following the death of HM The Queen last week.

“Positively, 2023 UK GDP forecasts were raised last week after the government announced its plan to freeze energy bills for two years which is expected to lead to a shallower recession and reduced near-term inflation,” Brookes explained. 

“However, it is also likely to see interest rates pushed higher than originally expected.”

The Monetary Policy Committee has postponed any decisions on further rate rises until September 22, after the Queen’s state funeral.

The Bank of England has raised the base rate of interest at each MPC meeting since December last year, including a 0.5 percentage point raise in August to take the rate to 1.75 per cent. 

Meanwhile, inflation is expected to hit at least 13 per cent, and last week the pound plunged to its lowest levels against the dollar since 1985.

The weakening of sterling reflects the mounting woes facing the UK, including the high price of energy, soaring inflation and potentially steep rises in interest rates.

Bristol-based mortgage broker Graham Cox said his biggest concern regarding the economy right now is the possibility of a run on the pound. 

“Some analysts are predicting sterling could soon reach parity with the US dollar,” he said.

“With oil and gas imports priced in the greenback, that would be highly inflationary in the short term and a disaster for the economy. There's no denying business confidence is at rock bottom right now.

"But often things aren't as bad as they first seem, and I suspect inflation will start falling just as quickly as it's risen."

ruby.hinchliffe@ft.com