Recession jitters as economy shrinks more than expected in July

Economists had been forecasting a 0.2% decline.

It was the biggest decline since December and comes amid fears that more than a year of Bank of England interest rate hikes to tackle inflation are stifling growth.

The ONS said all three key areas of the economy – services, construction and production – declined in July.

Lower activity in the services sector was the biggest factor of the latest monthly slump.

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The ONS said the human health and social work activities sector saw a 2.1% fall as a result of strikes by NHS senior doctors, radiographers and junior doctors.

Bad weather was also blamed for depressing retail sales and building projects.

With the Bank of England expected to raise rates for the 15th time in a row next week, Chancellor Jeremy Hunt insisted tackling inflation was key to economic growth.

He said: “Only by halving inflation can we deliver the sustainable growth and pay rises that the country needs. But there are many reasons to be confident about the future.

“We were among the fastest in the G7 to recover from the pandemic and the IMF (International Monetary Fund) have said we will grow faster than Germany, France and Italy in the long term.”

But James Smith, developed markets economist at ING, said a  technical recession – defined as two consecutive quarters of decline – “can’t be ruled out”.

He said: “Cutting through the noise, the economy seems to be still growing, albeit fractionally.

“The change in activity over the past three months relative to the three months before is still slightly positive.

“We think the economy is likely to more or less flatline over coming quarters – and a mild recession can’t be ruled out.”

ONS director of economic statistics Darren Morgan said: “Our initial estimate for July shows that GDP fell; however, the broader picture looks more positive, with the economy growing across the services, production and construction sectors in the last three months.

“In July, industrial action by healthcare workers and teachers negatively impacted services, and it was a weaker month for construction and retail due to the poor weather.

“Manufacturing also fell back following its rebound from the effect of May’s extra bank holiday. A busy schedule of sporting events and increased theme park visits provided a slight boost.”

Labour’s shadow chancellor Rachel Reeves said the figures revealed “another dismal day for growth” and the British economy was a “hostage” to low growth under the Tories.

“After thirteen years of instability, the Conservatives have left the British economy weaker and families having to cope with higher taxes, higher mortgages and higher food and energy bills,” she said.

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However Business and Trade Secretary Kemi Badenoch insisted: “The Government’s economic plan is working and it has been working for quite some time.

“The previous month’s GDP figures went up by 0.5%, over the summer it went down 0.5%.

“I would say that is stable rather than it not being something that is growing.”

Speaking at an investment conference in Belfast, she went on: “What I would also emphasise are the trading figures, our export figures are actually growing, they are 16% up on this time last year. So, there is a good story to tell about the UK economy figures.

“We need to look at the longer trend rather than just month to month.”

Shadow health secretary Wes Streeting accused the Government of being “penny wise, pound foolish” by failing to resolve strike action affecting the NHS.

He said: “As the ONS reports, it is not just that we are seeing significant numbers of delayed and cancelled appointments and operations, which is awful for patients.

“This is harming the economy. And in fact, take the junior doctors’ dispute – industrial action has already cost the NHS more than £1 billion. That is more than half of what junior doctors have asked for in terms of their pay settlement.

“So this is a Government that is being penny wise, pound foolish, harming the NHS and harming the economy simultaneously.

“And I don’t understand why, when the NHS crisis is one of the two biggest crises in our country today, and strikes are at the heart of the crisis now, why the Prime Minister hasn’t met the doctors once, why the Health Secretary hasn’t met them since March.

“What are these people doing to resolve the worst crisis in the history of the NHS?”