UK recession threat looms as economy grinds to a halt to mourn queen

Bank holiday for state funeral could send UK productivity plummeting

Britain’s fragile economy was already teetering on the edge of recession even before the death of Queen Elizabeth II last week. That prospect now looms a lot larger, as businesses cancel events amid the period of national mourning culminating in a UK bank holiday next Monday for the late monarch’s funeral.

Economists say UK high street shops closing their doors or operating reduced hours on Monday, alongside the loss of a full working day, will lead to a sharp fall in output at a time when the country is struggling for growth momentum amid the cost of living crisis.

Estimates of the hit to the UK economy are inevitably sketchy and for the time being rely almost entirely on anecdotal evidence. There is already a rush of mourners to London, creating unprecedented demand on transport, in a boon for the capital’s hoteliers, cab drivers, hospitality venues and flower sellers, making up for losses elsewhere. However, it is unlikely to make up for the overall drop in activity.

“We see a greater risk that the UK slips into technical recession,” said Modupe Adegbembo, an economist at AXA Investment Managers. “As the UK mourns the death of the queen, the additional bank holiday that has been granted for her funeral could see growth shift lower than we had initially expected, increasing the risk that the UK slips into technical recession this quarter.”

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On past form, it is a question not of whether there will be a hit to growth but of how big the hit will be. There were extra bank holidays in 2002 to mark the queen’s golden jubilee and in 2012 to celebrate the marriage of the Duke and Duchess of Cornwall and Cambridge, and both resulted in weaker activity as factories, offices and construction sites were shut down.

Over time, the growth of the digital economy has meant the impact of an extra day off has diminished, but even so a double bank holiday to mark the queen’s platinum jubilee shaved about 0.5 percentage points off monthly growth in June. A repeat of that next week would reduce gross domestic product by £10-11 billion (€11.5 billion-€12.7 billion) given that the UK is a £2.2 trillion economy.

On top of that, there will be the additional lost output associated with businesses closing, and events being postponed during the 10 days between the queen’s death and her funeral. Some of this spending will be deferred rather than lost for ever, with postponed football matches played at a later date and meetings re-scheduled.

However, some of the spending will never be recouped and even a small reduction in gross domestic product in September would be enough to tip the balance in favour of a second successive quarter of negative growth. The UK economy contracted by 0.1 per cent in the three months to June. Two consecutive quarters of falling GDP are regarded by economists as the technical definition of a recession.

Official figures show the UK economy staged a weaker than expected recovery in July with monthly growth of 0.2 per cent, following a sharp 0.6 per cent fall in output in June, when the loss of a full working day due to the platinum jubilee weighed on activity.

After UK prime minister Liz Truss announced plans to freeze consumers’ energy bills from October, analysts expect that headline UK inflation is now unlikely to rise much further than the 40-year record set in July of 10.1 per cent (it fell to 9.9 per cent in August, figures showed on Wednesday). However, while helping households with their living costs should cut the severity of a recession, it is unlikely to avoid one entirely, as UK families will still face gas and electricity costs of more than double a year ago.

Paul Dales, chief UK economist at Capital Economics, said he expected GDP would eventually regain its previous level but some of the growth that would have happened will be foregone. Mr Dales was already pencilling in a second quarter of negative growth between July and August, but now thinks the decline in the third quarter will be steeper.

Some sectors and some regions of the UK will do better than others. London’s hospitality sector is expected to do good business from the crowds flocking to the capital to pay their respects. George Buckley, economist at Japanese bank Nomura said: “Florists in London will do well and sales of coffee will to through the roof. But in aggregate people aren’t going to be producing as much.” — Guardian service