UK economy contracts by only 0.4%

The tale of the incredible shrinking economy continues. However, the pace of contraction is slowing; the UK is edging back towards growth.

by Rebecca Burn-Callander
Last Updated: 19 Aug 2013

The UK economy contracted less than anticipated in the second quarter, reckons the Office for National Statistics, shrinking 0.4%. And given that it was expecting a decline of between 0.5% - 0.7%, that’s not so bad. 

The ONS doesn’t fine-tune its workings out according to the number of working days in a quarter either, so the overall picture is actually even better than it seems. The UK lost a working day for the Queen’s Jubilee, and had the numbers been adjusted accordingly, GDP wouldn’t have contracted at all. It may even have shown a modest growth spurt.

This means that the second half of the year is shaping up to be substantially better than the first half. Not that the UK and its economy are about to walk off into the sunset, arm in arm. Various industries are still feeling the pinch right now.??Construction is faring worst, contracting by 3% (better than the 3.9% forecast, however). Manufacturing is also having a tough time, showing a 0.8% decline (compared to the 0.9% predicted at the start of the quarter). Services have shrunk 0.1%, bang on estimates. 

Good news for the consumer today though. While household spending fell 0.2%, that’s but half the 0.4% anticipated by the ONS. And real disposable incomes are up 1.9% too. The government is also doing its bit to encourage growth, spending 0.3% more than the same quarter last year. 

The biggest spenders in the last quarter, however, were UK businesses. Business investment rose 0.9% instead of declining 1.5%, as the ONS predicted. It’s not enough to bring about an upturn but at least it’s something, and evidence of a return to corporate health. 

What next for the UK economy? Most economists predict a light rebound in the third quarter. Looking at the export data, retail sales, industrial production and tax receipts from July, all signs point towards growth. As do the August PMI surveys. However, with the ongoing strife in the eurozone remaining a real cause for concern, it’s unlikely we’ll see a full turnaround any time soon. Keep calm and carry on. 

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