UK economy: Why is it shrinking?

Latest official figures show that the double-dip recession in the UK has deepened.

In the second quarter of the year, that is, between April and June, the output of the economy shrank by 0.5%. This decline has shocked many, although it is better than the original estimate of 0.7% contraction.

But what is behind that number? Are there any brighter points and which sectors of the economy are being hit hardest by the downturn?

UK economy snapshot

Why is it shrinking?

Source: ONS (figures are most recent available data)

Workers at the Olympic Park

Construction

Down 3.9%

Construction is suffering a sharp slowdown. The housing market is still in the doldrums and there has also been a big drop-off in government spending on social housing and infrastructure. The building sector may also be feeling the effects of the end of big Olympics projects.

Copper wire

Industry

Down 0.9%

Output from manufacturing industries is declining faster than at the start of the year, reflecting uncertainty at home and abroad, particularly in the eurozone, one of the UK's biggest export markets.

Shopper

Retail

Down 0.1%

The retail sector contracted slightly between April and June, following a period when it grew slightly at the start of the year. This period of relative stagnation may reflect the continued squeeze on consumers, or temporary factors such as the unseasonably bad weather in April and June.

Is there any good news?

Job centre

Jobs

Employment up 181,000

Despite the worsening of the double-dip recession, companies have been taking on more staff. Many of them have been part-time, but full-time employment has also started to pick up.

Inflation

Inflation

Prices rose 2.4% in June

Prices rose at their lowest rate for three years in June due to falling clothing and fuel prices, easing the squeeze on household budgets. It should encourage spending, but wages are still failing to keep up.

The known unknowns

Shopper with umbrella

Weather

?

What effect did the bad weather have on GDP? The ONS says it doesn't yet know. This matters because it could answer the question of whether this quarter was a wash-out because of the unusually bad downpours, or because of something more substantial like the eurozone crisis.

Jubilee spectators

June bank holiday

?

Ditto the effect of the extra bank holiday in June. Based on the experiences of the Silver Jubilee in 1977 and the 2002 Golden Jubilee, the ONS reckons that the extra day off caused a "substantial" drop in output. But because this is highly unusual and because it doesn't have much data yet on June, the 0.7% drop is more likely than normal to change.

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