The economy shrank 0.1% in the three months to June, the first time it has contracted over a quarter since Spring 2021.
GDP fell by 0.6%, services fell by 0.5%, manufacturing by 1.6% and construction by 1.4%. However, this was well below the 1.3% forecast.
Darren Morgan, director of economic statistics at the ONS, said: “Health was the biggest reason the economy contracted as both the test and trace and vaccine programmes were wound down, while many retailers also had a tough quarter.
“These were partially offset by growth in hotels, bars, hairdressers and outdoor events across the quarter, partly as a result of people celebrating the Platinum Jubilee.”
The figures from the Office for National Statistics (ONS) raise further concerns about the fragile health of the economy with a recession expected to begin in the Autumn.
Last week, the Bank of England warned that it expects the economy to enter its longest recession since the financial crisis in the fourth quarter.
Inflation, meanwhile, is projected to peak above 13% in October.
Chancellor Nadhim Zahawi said: “I know that times are tough and people will be concerned about rising prices and slowing growth, and that’s why I’m determined to work with the Bank of England to get inflation under control and grow the economy.”
Reaction
Lewis Shaw, founder of Mansfield-based Shaw Financial Services:
“The outlook for the economy is dire. It feels like the country and economy have been thrown to the wall; all the government is bothered about is this leadership race, with nobody handling the scale of the problems developing.
“We’re accelerating towards the cliff edge, the steering wheel has come off and the brakes have been cut. If we hit a five-quarter recession and unemployment rises, it will have a disastrous ripple effect throughout the UK. The economy will crash and burn in the ravine.
“We need direct economic intervention; now is the time to throw off economic orthodoxy; it’s time for helicopter money. That is the only way out of this crisis unless the government is prepared to accept a General Strike and significant civil unrest.”
Ed Rimmer, CEO of Bath-based SME finance provider, Time Finance:
“Over the past six months, there has been a significant shift in business optimism. At the end of last year, the firms we spoke with were optimistic about the future, with a third planning to invest in and expand their workforce. Fast forward six months and it’s a very different outlook.
“One in ten businesses now say they are struggling to keep up with their current financial responsibilities. Unless something is done quickly, these businesses won’t survive. Employers are under a lot of pressure right now. Many simply aren’t able to raise their prices to keep up with the rising cost of living and, as a result, we’re locked in a vicious cycle. Drastic action is required.”
Mark Richardson, partner at Derby-based chartered surveyors, BB&J Commercial:
“I hope businesses are better prepared for a possibly very long recession than last time around during the Global Financial Crisis.
“That was a steep learning curve for many, and I hope the lessons haven’t been forgotten. The government isn’t doing a great deal at the moment to intervene, but a lot of the factors contributing to our current economic woes are outside of their control.”
Richard Pike, chief sales and marketing officer at Phoebus Software:
“Today’s GDP figures really do highlight the volatility of the economy and create many questions. A reduction on the previous three months isn’t a huge surprise, and the Bank of England has already stated it expects a recession to happen in at least the short to medium term.
“Obviously this is against a backdrop of rising rates and inflation going skywards which in turn is causing many workers to strike for inflation matching pay rises. But with GDP reducing, many businesses have less revenues to hand out inflation busting pay deals.
“We will undoubtedly see an influx of inbound communication into various agencies such as Citizens Advice by people not just financially struggling today, but perhaps looking at how they will cope in the future.
“Could it be the right time for lenders and banks to upskill certain staff to be able to give more generic, non-regulated advice on household budgeting and understanding in detail the areas of support that are available today or measures that are coming down the line to be able to engage with customers that are concerned?
“This sort of proactive behaviour will certainly give early sight of potentially problem cases, but as importantly, will build borrower loyalty and be seen very positively from an ESG perspective, an area that is rapidly becoming more important in our sector.”
Dave Kelly, co-founder of Bristol-based butcher, Ruby & White:
“A giant cleaver is coming down onto our economy and the Government is simply watching on. Inflation, soaring energy bills, tax hikes and interest rate rises are crippling people and small businesses alike. With the economy officially contracting, we need action and we need it now.”
Keith Budden, MD at Hampshire-based IT security firm, Ensurety:
“There is zero urgency in Government. As the economy drifts towards the rocks, Rishi and Liz are arguing over who can grab tomorrow’s headlines, while Boris is like a Red Letter Day junkie. Our leaders need to get a grip and grab the rudder before the whole damn boat goes down.”
Dr Jackie Mulligan, expert on the Government’s High Streets Task Force and founder of the local shopping platform, Shopappy:
“And so the great contraction begins. Sadly, this is likely the beginning of a very long and deep recession. Based on what we’re seeing on the ground, the contraction of the economy has a long way to go yet.
“Millions of families and small businesses are in an unimaginably difficult place, financially and emotionally. The terrifying level of inflation in particular is a double whammy for the small family businesses that line the UK’s high streets.
“They’re being hit in the tills and in their own pockets at the exact same time. I hope that the Government will step in to help the thousands of family businesses that are struggling to stay afloat.”
Ollie Hayes, a former professional rugby player, personal trainer and founder of So Fit Bath:
“While our economy contracts, and small businesses in all sectors are being pummelled, a political pantomime plays out in Westminster.
“For millions of small firms, it’s more brutal now than it was during the pandemic but policymakers and the people running this country don’t appear to have any urgency. The whole lot of them should be red-carded.”
Mary Maguire, managing director of UK-wide recruiter, Astute Recruitment:
“Until the next PM is elected, we are rudderless economically. With the economy shrinking, businesses need decisive and adept leadership, but a vacuum of non-urgency stagnates throughout Parliament.
“My worst fear is that MPs, the Bank of England, the IMF and others are actually talking us into a far worse recession with their relentless tide of doom and gloom. The Government needs to act fast and decisively.
“Corporation tax should be held at 19%, employer’s and employee’s NI should be reduced, even if as a temporary measure until April 2023. And why not give firms tax deduction opportunities against cost-of-living fuel payments they make to staff? A windfall tax against the big energy suppliers who have enjoyed unprecedented profits this year could pay for this.”
Jenny Blyth, owner of London-based Storm In A Teacup Gifts:
“As the country slides into an unprecedented recession, it is also on the verge of a mental health crisis that it is not equipped to handle. The fallout from that could be worse than the economic carnage.
“We have a generation of children growing up seeing their parents and carers dealing with exceptional stress and we have adults who are increasingly depressed, anxious and stressed with nowhere to turn.
“The NHS does not have the facilities to deal with an influx of mental illness. We have waiting lists for therapies that are over a year long and people are not going to wait. When winter comes, it’s going to get even worse. This government has blood on its hands.”
Maryann Penfold, owner of Worthing-based artisan hot chilli sauce maker, Boom Sauce:
“The economy is broken, with inflation and rising interest rates destroying small businesses by the day. I am genuinely worried about the future of my own business as customers are spending much less. I cannot increase my prices as that risks losing customers and equally I cannot reduce them as the cost of ingredients has shot up. Many small artisan producers like me are in a Catch-22 situation. Lowering prices when raw material costs are skyrocketing just isn’t viable.”
Sarah Newland, founder of business consultancy, Keyboard Smash:
“In the current economic climate, buying decisions from clients are extremely slow. Leads are fewer, cash flow is tighter and more clients are reneging on contracts or finding reasons not to pay.
“We’ve tightened up on our contracts and are focusing on promoting lower cost services. We have also committed to paying the freelancers in our agency in 7 days, regardless of whether the cash has come in. The Government should be undertaking discussions with small businesses so they appreciate the crunch we’re under, rather than creating blanket proposals that don’t affect the people on the ground.”
Chris Maslin, director at Tunbridge Wells-based employee ownership specialists, Go Eo:
“Times are really hard, there’s no doubt about it. We’ve already had staff asking to work from home more as the cost of petrol to commute is hurting them. Some employers will do their best to give staff pay rises to cover inflation but not all businesses can achieve that without going under themselves.
“If a prolonged recession takes hold, things will be beyond tough for the average small business. When your customers or clients are struggling, you can’t just hike prices to cover rising costs.”
Amy Sabin, of Wareham-based personal training firm, Future Fit Training:
“A significant percentage of the population works for small businesses, so it’s incredibly important these businesses survive.
“It’s vital the Government listens to this sector and balances their needs with the different approach needed for larger companies during the tough times ahead. It just doesn’t feel like there’s much urgency to address the current economic crisis, much like the mental health crisis that will almost certainly follow.”
