The UK economy shrank at the fastest pace in seven months in July as strikes and wet weather hit activity harder than expected, reviving fears that a recession may be under way.

Gross domestic product slipped by 0.5% following a 0.5% gain in June, the Office for National Statistics said Wednesday. Economists had expected a contraction of 0.2%. Services, construction and manufacturing all shrank.

Britain’s economy, which the Bank of England expects to stagnate at best for much of the next two years, is now losing steam in the face of a sharp increase in borrowing costs. That may give policy makers pause for thought when they decide next week whether to raise interest rates again in their fight to tame inflation.

“Underlying growth has lost momentum since earlier in the year,” said Paul Dales, at Capital Economics, noting a mild recession may in fact have begun. “These data suggest GDP growth in the third quarter as a whole is likely to fall well short of the Bank of England’s 0.4% quarter-on-quarter forecast.”

That’s bad news for Prime Minister Rishi Sunak, who faces the prospect of a general election next year with his Conservative Party lagging far behind the Labour opposition in opinion polls. Chancellor of the Exchequer Jeremy Hunt said the UK is doing well compared to other countries.

“There are many reasons to be confident about the future. We were among the fastest in the G-7 to recover from the pandemic, and the IMF have said we will grow faster than Germany, France, and Italy in the long term,” Hunt said in a statement.

In an interview on Bloomberg Radio, Gareth Davies, the exchequer secretary to the Treasury, said economists have been too gloomy.

“Not too long ago, a lot of the forecasters were saying that a recession by now, and that hasn’t happened,” he said. “The IMF, Bank of England and the OBR all upgraded their forecasts for growth.”

The pound fell to a three-month low after the release, falling as much as 0.4% to $1.2442. Yet the data did little to change the outlook for rates traders, with money markets pricing a quarter-point hike to 5.5% by November — little changed on the day. Odds still favor another increase to 5.75% by year end. BOE Governor Andrew Bailey has signaled the most aggressive hiking cycle since the 1980s is almost complete.

While most economists had expected the UK to eke out modest growth in the third quarter, the scale of July’s decline makes a contraction more likely. Bloomberg Economics thinks the UK may now be in a recession that will persist through much of 2024.