UK economy under pressure as GDP shrinks in Q2 – experts share their views

by | Aug 12, 2022

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As the impact of the cost of living crisis takes its toll, the ONS has today reported that UK GDP fell by 0.1% over the second quarter of 2022. Although it was slightly better than many economists’ predictions, concerns are growing that another quarter of negative growth in Q3 – still a distinct possibility given today’s inflationary spiral – could mean the UK enter a technical recession somewhat earlier than many had been expecting.

But what does today’s negative GDP number really mean for the UK economy? What does it mean for consumers and businesses? And for the world of investment? Experts from across the financial services profession and from other sectors have been sharing their views with us. They paint a gloomy picture as follows:

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.”

Tom Hopkins, Portfolio Manager at BRI Wealth Management, said: “UK GDP came in at -0.1% in the second quarter 2022, marginally better than the -0.2% consensus expectation.


“Despite this reading beating expectations, the figure still shows the UK in negative growth which comes at no real surprise as the UK is at a growing risk of slipping into a technical recession.

“The contraction can be attributed to a weak level of activity in June, in the wake of the extended bank holiday to celebrate the Queen’s jubilee. Additionally, rampant inflation, exacerbated by the War in Ukraine and pandemic-related supply chain disruptions, and the deepening cost-of-living crisis.

“Last week the Bank of England gave a very gloomy outlook for the UK economy, predicting that the UK is heading for a 15-month recession. They also predicted that inflation would peak at 13 per cent and remain above 10 per cent for much of 2023 resulting in the worst hit to household living standards in 60 years. Notably the pound is one of the worst performing out of the G10 currencies this year, having fallen almost 10% against the US dollar in 2022.


“In the MPC’s view, trying to curb these pressures requires painful medicine: higher interest rates to slow demand and to take some of the heat out of the jobs market even as high energy prices is already squeezing consumer incomes. As we look at other economies, the US is in a technical recession and if the rest of the EU, too, slides into recession, then maintaining much economic momentum here will become difficult.”

Ben Seager-Scott, Head of Multi-Asset Funds at Evelyn Partners, comments: “UK GDP contracted -0.1% in the second quarter, which was fractionally better than the -0.2% forecast but a marked slowdown from the 0.8% growth seen in the first quarter. Looking at the year-on-year number, Q2 2022 rose 2.9% compared to Q2 2021, again very slightly ahead of forecast 2.8% and a normalisation from the 8.7% seen in Q1. Spending by government fell notably (-2.9% quarter-on-quarter, versus -0.1% expected) whilst private consumption was also a little weaker (-0.2% versus 0.0% expected), however we did see a strong gain in business investment which rose 3.8% (1.2% expected).

What does it mean?  “There were no real surprises, not least because we now get monthly readings from the government meaning we already had April and May data so it was just the June data that was new. The lack of surprise is little comfort from the clear trend of cooling economic activity as Central Banks continue to battle inflation at a global level and are signalling their willingness to tolerate significant economic pain to achieve their aims. This was perhaps most clear with the bleak economic projections put out by the Bank of England recently. A downturn in the near future is now all but inevitable (and priced in, to an extent), but current indications are that it could be relatively mild, and one might consider the continued pace of business investment a positive sign as corporations look to growth potential in the next business cycle. However, businesses do not operate in a vacuum, and cooling consumer activity as well as the tough global backdrop could change things pretty quickly, and we have yet to see the impact of the cost-of-living crisis.


Bottom line: “The UK economy faces pretty significant headwinds which could make life difficult for domestically-focussed firms. As we know, the UK stockmarket derives most of its revenue from overseas, and we continue to advocate favouring those larger global businesses listed in London whilst being more selective in the mid- and small cap space, particularly those that are focussed more on the UK economy.

George Lagarias, Chief Economist at Mazars says: British economic output continues to slow down as pressures pile on consumers. With inflation over 8%, many UK households have been in ‘recession’ long before the official numbers can confirm it. Higher rates, higher prices and more taxes are suppressing consumption and sentiment. Yet, we are still far from the point where central banks would stop aggressive tightening. We expect economic pressures to worsen in the near future, at least until prices begin to materially de-escalate and the BoE feels comfortable dialling back interest rates.” 

Melanie Baker, senior economist at Royal London Asset Management, said: “The message from the data was not as gloomy as the fall in Q2 and June GDP growth might suggest. Focusing on June, GDP fell by less than expected, there was a loss of two working days compared to normal and reduced test and trace/vaccination activity played a key role too. In other words, it is difficult to view the fall in GDP as a sign of significant underlying deterioration in economic activity. At least not yet.


“I continue to have a recession pencilled into my forecasts, but for the turn of the year rather than sooner.  Pay growth is not keeping up with inflation, consumer confidence is very weak, the Bank of England continues to hike rates. Energy prices remain a serious issue for the economy and a very large energy bill increase for households is widely expected in October, though there is still potential for more fiscal help for households too.”  

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.”

Derrick Dunne, CEO of YOU Asset Management (YOU), commented: “ On a monthly basis the ONS recorded a 0.6% contraction for June, with particularly sharp drops in the services, production and construction sectors.


“While undoubtedly bleak, today’s data comes as no huge surprise, with the Bank of England making no secret of the fact that it’s heightened focus on tackling inflation could dampen economic growth – and most likely drag the UK into a recession by the end of this year.

“But despite all of this, there are some clear glimmers of hope for investors to hold onto. We are seeing supply chains beginning to heal for instance, while any recession should hopefully reduce inflation concerns, in turn improving consumer sentiment.

“As we navigate the next few months, investors should try to be patient and seek reassurance in the fact that recovery will come, albeit not immediately.” 


Samuel Fuller, Director of Financial Markets Online comments: “The UK economy slammed on the brakes in the second quarter, not helped by war, inflation and extra holidays. GDP may have beaten expectations by a whisker but, having flipped into reverse, that’s not going to count for very much. There may be good reasons for this readout but the stop-start recovery is still a grim reality with recession bearing down.

“Andrew Bailey has set such poor expectations for the UK economy over the next 18 months, recession is a foregone conclusion and the risk is it ends up being deeper than it needs to be. Businesses everywhere will now be planning their hiring and investment strategy around a pretty torrid 2023. That’s been putting the pound under pressure even as expectations have risen that the Fed will tighten more slowly and Bank of England interest rates will continue to rise. 

“With Sterling already pretty weak after a sustained slump against the dollar, the pound didn’t react too badly. With the US already in technical recession the UK’s in good company and it’s still very unlikely the UK will post a second consecutive contraction in Q3. 

“However, with inflation predictions of over 13% by the start of the fourth quarter, it’s going to continue to be bumpy from here. The inflation fight is top billing and the economy is just going to be dragged along with it.”

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.”

Richard Pike, chief sales and marketing officer at Phoebus Software, says “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.”

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.”

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.”

Danni Hewson AJ Bell financial analyst comments:  “It is too early to start shouting ‘recession’ but the 0.1% contraction in the economy between April and June is adding to concerns that it’s most certainly round the corner. Another three months will tell the tale, and as many households are already cutting back on both discretionary spend and everyday essentials, while businesses struggle under the chokehold of sky-high inflation, the mood music is sombre. 

“June’s 0.6% fall had been expected, although the joy of the Jubilee bank holiday was a double-edged sword for the economy. Whilst bars and restaurants, hotels and festivals provided a welcome distraction from the day to day, it also meant two days when offices were closed, factories idled and building sites fell silent.

“But that doesn’t tell the full story. Manufacturing and construction both fell significantly in June as higher energy prices and increased costs of materials had businesses taking a long look at their margins. And whilst a surge in GP visits helped offset the fall in covid measures in May, it couldn’t do the same for June’s numbers. Track and Trace, lateral flow testing and booster vaccines have gradually been petering out. And the surge in bookings seen at travel agents also couldn’t be sustained; this year’s summer holiday could only be booked once and the pressure on budgets is unlikely to leave any wiggle room for many bonus breaks.

“May’s surprisingly robust growth number has been revised down from 0.5% to 0.4% and this was a month which enjoyed an extra ‘productive’ day as the normal Whitsun bank holiday was shifted into June.

“Looking at the second quarter as a whole there are obvious signs that high prices are dampening consumer spending power, with a 0.2% fall in real household consumption. The question is, how will the underlying weakness in the economy manifest once all the temporary factors are taken away?

“Will costs for items like asphalt, concrete and bricks prove surmountable for the construction industry? Despite a dip in June the sector grew over the quarter and is 2.7% up on where it was before the pandemic. Demand for housing stock is still high despite recent rate rises and though average house prices are expected to fall back on recent highs, housebuilders say their forward orders remain robust. Then there’s the big switch to greener energy and other infrastructure projects which could keep the sector buoyant even as the economy contracts. Certainly, business investment over the last quarter is up which is massively important for growth.

“But retail is struggling and consumer facing services as a whole are still 4.9% down on where they were before lockdowns were a thing. A summer of rescheduled celebrations might have sent people scurrying back to hairdressers and beauty salons. But those one-off visits can’t make up for the regular touch-ups that have become less frequent since people got used to having to do it themselves. If money is tight those DIY beauty tactics will most certainly be pressed back into service.”



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