By William Schomberg and Andy Bruce

LONDON (Reuters) – Britain’s economy grew by less than expected in July, raising the risk that it is already in a recession, with the sharp climb in energy tariffs hurting demand for electricity and a leap in the cost of materials hitting the construction sector.

With inflation at a 40-year high of more 10%, gross domestic product expanded by 0.2% from June, official data showed on Monday, weaker than a median forecast of 0.4%.

In the three months to July, GDP was flat compared with the previous three-month period.

Some economists said Monday’s data suggested the economy might be on course to shrink in the July-September period having contracted by 0.1% in the April-June quarter.

“This would mean that the UK enters a technical recession for the first time since lockdown restrictions ended,” Jake Finney, an economist at PwC, said.

Paul Dales at Capital Economics said a “disappointingly small rebound in real GDP in July suggests that the economy has little momentum and is probably already in recession.”

In August, the Bank of England forecast a recession for the world’s fifth-biggest economy lasting from the end of 2022 until early 2024, due in large part to the hit to living standards from energy prices, pushed up by the war in Ukraine.

But last week Liz Truss announced a cap on domestic energy tariffs which – along with an expected round of tax cuts – reduced the risk of such a protracted hit to the economy, albeit at a cost of 100 billion pounds ($116 billion) or more to Britain’s already stretched public finances.

The Office for National Statistics (ONS) said anecdotal evidence suggested that the surge in power prices was changing consumer behaviour and demand for energy had fallen.

Electricity prices leapt by 54% in the 12 months to July, part of the surge in power costs that led to new Prime Minister

HOLIDAY IMPACT

Gross domestic production had fallen by 0.6% in June, which included two days of public bank holidays to celebrate the late Queen Elizabeth’s 70 years on the British throne.

An ONS spokesperson said the impact of the holidays was not a big factor in July.

Samuel Tombs, at Pantheon Macroeconomics, said a new public holiday scheduled for Sept. 19, the day of the queen’s funeral, would reduce economic output by 0.2 percentage points this month, but a recession would probably be narrowly avoided.

Despite the slowing economy, the BoE is expected to raise interest rates again on Sept. 22 as it seeks to combat an inflation rate above 10%.

A heat-wave in July, which brought record-breaking temperatures, might have been another factor behind the fall in power demand although there were signs that it boosted ice cream manufacturers and visits to amusement parks and golf clubs, the ONS said.

Services output grew by a monthly 0.4% in July but industrial production was down 0.3% and construction dropped by 0.8%, reflecting the jump in prices for materials, part of the broader inflation surge, as well as lost working hours because of the extremely hot weather.

Separate trade figures also showed the impact of soaring prices with the value of imports of fuel hitting an all-time high of 11 billion pounds in July and representing a record 21% of all goods imports.

($1 = 0.8609 pounds)

(Reporting by William Schomberg and Andy Bruce; editing by Philippa Fletcher and Toby Chopra)

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