The UK is facing an extended period of weak growth as policymakers battle to control inflation and this week’s data releases will confirm that the risk of the economy sinking into recession has risen substantially.

With house prices falling at the fastest pace since the 1930s and family budgets under pressure from rising petrol costs, utility bills and food prices, the outlook for consumer spending has clearly deteriorated.

Supermarkets have begun price wars and retail sales data for June, due on Thursday, will provide an insight into how well high street spending is holding up.

In May, retail sales volumes recorded an extraordinary jump of 3.5 per cent, the strongest monthly gain for 20 years, which prompted head scratching among analysts as it was entirely at odds with survey evidence and updates from major retailers such as Marks and Spencer.

May’s strong performance has been attributed to an improvement in the weather and sales promotions but it looks likely to be reversed in June’s data. The consensus forecast is for retail sales to fall by 2 per cent in June which would slow the year-on-year growth rate from 8.1 per cent in May to 5 per cent.

UK second-quarter gross domestic product data are also due for release on Thursday. The preliminary estimate indicated that the economy expanded by 0.4 per cent in the second quarter with year-on-year growth running at 2.3 per cent.

Historically, revisions to preliminary GDP data have tended to be upwards as more data becomes available. However, in the second quarter, the purchasing managers’ surveys for manufacturing, construction and the service sector all suggested activity was contracting. So downward revisions in Thursday’s GDP release are expected.

The consensus forecast is for growth in the second quarter to be revised down to 0.2 per cent and the estimate for year-on-year growth lowered to 1.6 per cent. The possibility that growth was negative in the second quarter cannot be ruled out and that outcome, as well as providing another blow to investor confidence, would inevitably lead to a rash of newspaper headlines proclaiming recession.

However, GDP data are subject to a process of prolonged revision which can substantially change any early assessments of how the economy has performed. But with the credit crunch making financing more problematic for both companies and consumers, the downturn in the economy appears highly likely to intensify in the second half of the year.

In Germany, the IFO survey for July, due on Thursday, will point to a further deterioration in the business climate with the headline index expected to fall from 101.3 in June to 100.

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