The UK economy experienced a larger contraction than anticipated in July, including a decline in the services sector. This suggests that the Bank of England's efforts to temper demand may be effective as it considers whether to continue raising interest rates.
According to data from the Office for National Statistics, gross domestic product (GDP) fell by 0.5% compared to the previous month. This missed forecasts which predicted a more modest 0.2% drop in output.
This decline follows an unexpected period of growth between April and June, during which the services sector expanded despite strikes and additional holidays. However, in July, both the services sector and the production and construction sectors experienced setbacks.
The contraction in July implies that the Bank of England's policy of raising interest rates is starting to have a cooling effect on demand and activity in the UK economy. Economist Paul Dales at Capital Economics even suggests that this could be the beginning of a mild recession. He notes an "air of underlying weakness" within the economy.
Next week, the Bank of England will decide whether to raise its benchmark interest rate for the 15th consecutive time, surpassing the current 5.25%. Despite signs of weakening demand, Dales believes that the bank is still likely to opt for a rate hike.
Headline inflation in the UK remains high at 6.8%, exceeding that of many other major Western economies. However, the decline in the services sector may encourage bank policymakers as it is a crucial driver of core inflation.
While recent unemployment figures showed a slight rise in the jobless rate during the three months leading up to July, wage growth remained stable. Economists are divided on whether the bank should proceed with another rate hike, as some caution that excessive tightening can lead to higher unemployment and push the country into a more severe recession.
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