UK economy shrinks in March as GDP falls

·Finance Reporter, Yahoo Finance UK
·6-min read
UK economy Workers cross London Bridge, with The Shard skyscraper seen behind, during the morning rush-hour, as the coronavirus disease (COVID-19) lockdown guidelines imposed by British government encourage working from home, in the City of London financial district, London, Britain, January 4, 2022. REUTERS/Toby Melville
UK economy drop fuels fears that the country is heading towards a recession. Photo: Toby Melville/Reuters

The UK economy contracted in March, as the cost of living crisis hits families and threatens to push the country into recession.

New data released by the Office for National Statistics (ONS) on Thursday showed that GDP fell by 0.1% in the month, slightly worse than the 0% growth forecast. The UK’s service sector shrank by 0.2% in March, and was the main contributor to March’s 0.1% drop in GDP.

Output in consumer-facing services fell by 1.8%, following a 0.5% growth in February 2022.

Read more: Cost of living: 1.5 million UK households face bills they can't afford

February’s GDP has been revised down to 0% growth, down from the +0.1% first estimated

Looking at the quarter, the UK economy grew by 0.8% between January and March, down from growth of 1.3% in the previous three months. This was driven by hospitality and travel industries recovering from coronavirus pandemic restrictions.

Darren Morgan, director of economic statistics at the Office for National Statistics (ONS), said: “The UK economy grew for the fourth consecutive quarter and is now clearly above pre-pandemic levels, although growth in the latest three months was the lowest for a year.

“This was driven by growth in a number of service sectors as the economy continued to recover from Covid-19 effects, including hospitality, transport, employment agencies and travel agencies. There was also strong growth in IT.”

Read more: Is the UK heading into a recession?

“Our latest monthly estimates show GDP (gross domestic product) fell a little in March, with drops in both services and in production.

“Construction, though, saw a strong month, thanks partly to repair work after the February storms.”

Prices are rising at their fastest rate for 30 years, driven by soaring fuel, food and energy costs.

Chancellor Rishi Sunak said: “The UK economy recovered quickly from the worst of the pandemic and our growth in the first few months of the year was strong, faster than the US, Germany and Italy, but I know these are still anxious times.

“Our recovery is being disrupted by Putin’s barbaric invasion of Ukraine and other global challenges but we are continuing to help people where we can.

“Growth is the best way to help families in the longer-term so as well as easing immediate pressures on households and businesses, we are investing in capital, people and ideas to boost living standards in the future.”

Production also shrank by 0.2%, but construction expanded by 1.7%

Alice Haine, personal finance analyst at Bestinvest, said: “The volley of blows dealt to the faltering recovery from the coronavirus pandemic, including surging fuel and energy prices, high consumer inflation, slumping business and consumer confidence and supply chain disruptions, are starting to take their toll on output.

“There is a high risk of an ongoing contraction in the coming months as the squeeze on real incomes ramps up amid the cost-of-living crisis, with inflation heading for double figures, all of which raises the spectre of stagflation (a combination of negative or stagnant economic growth and high inflation).

“The latest data highlights the scale of the challenge ahead for Britain’s economy, as the country also absorbs the hit from the global slowdown and Russia’s invasion of Ukraine. The National Institute of Economic and Social Research (NIESR) said this week it expects Britain’s GDP to fall by 0.2% in the third quarter and another 0.4% in the final three months of 2022."

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Inflation is set to accelerate from its 30-year high rates as energy costs have soared following Russia’s invasion of Ukraine.

Jack Sirett, head of dealing at Ebury, the global financial services firm, commented: “Today’s figures demonstrate the severity and effectiveness of the trade restrictions imposed upon the Russian regime by the UK government and its international partners in response to the war in Ukraine.

“Record-breaking import volumes at the start of the year have now reversed as companies rapidly re-order their supply chains to ensure a continued flow of goods and global powers look to wean themselves off Russian fuels.

“This week the UK government announced fresh sanctions on trade with Russia, slapping a third wave of restrictions and increased tariffs on goods like platinum and palladium where Russia is a leading producer. The government noted that 60% of exports to Russia are now under whole or partial restrictions so we would expect to see further declines in trading volumes with the government also committing to phasing out oil imports by the end of the year."

Daniel Casali, chief investment strategist at Tilney Smith & Williamson said the UK economy is slowing but investors should keep their eyes on global GDP.

"For investors, given that the large cap UK-listed companies derive the bulk of their sales abroad, it really is global growth that matters. The IMF recently forecast that the world economy would expand by an above average 3.6% in 2022.

"Along with the sharp EPS gains made by the energy sector, the outlook for UK company profits has improved. The consensus forecasts 15% earnings per share growth for 2022, a big pick-up from just under 3% at the start of the year. At the very least, rising company earnings (and cheap valuations) should limit UK equity downside in current volatile market conditions."

Martin Beck, chief economic advisor to the EY ITEM Club, said it is a disappointing start to the year: "With the consumers feeling the pinch and the Government tightening its purse strings, the onus is on companies to step up and invest more before the super deduction ends next year. But with business investment having fallen again in Q1 2022, the year has got off to a disappointing start in that respect.”

Rory Macqueen, principal economist at the thinktank NIESR, added: "March’s deterioration in consumer confidence translated into a sharp fall in retail and wholesale, which was exacerbated by continuing supply-chain problems in the motor industry.

"Offsetting this, the continuing normalisation of GP and hospital activities cancelled out falling COVID-related activity to mean that the health sector returned to month-on-month growth. Falling business investment in the first estimate for the first quarter is a concern: with the government’s tax ‘super-deduction’ expiring in under a year we still still see little sign of a recovery from the COVID shock.”

TUC General Secretary Frances O’Grady said the UK government must choose between an emergency budget or the growing risk of a recession.

“The Bank of England has warned the government that families are being forced to cut back, and the fall in demand will hit growth. But the Chancellor isn’t doing anything about it.

“The choice now is clear. Either the Chancellor steps up with an emergency budget to get pay rising, help families with soaring bills, and keep the economy moving. Or we risk sliding into recession, with families and businesses paying the price.”

The Bank of England forecasts the economy to alternate between near stagnation and contraction over the next two years.

Watch: How does inflation affect interest rates?

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