UK economy shrinks in April as households struggle against cost of living

·Finance Reporter, Yahoo Finance UK
·5-min read
The UK economy shrank in April, for the second month running as UK GDP fell by 0.3%. Photo: Peter Nicholls/Reuters Shoppers cross the road in Oxford Street, in London, Britain August 14, 2016.  REUTERS/Peter Nicholls/File Photo
The UK economy contracted by 0.3% in April. Photo: Peter Nicholls/Reuters

The UK economy shrank 0.3% in April as businesses felt the impact of price rises and supply chain shortages, according to the Office for National Statistics (ONS).

The economy contracted by 0.3% in April after it shrank by 0.1% the month before. The ONS said April’s drop in GDP was also the biggest contraction since January 2021.

Services were the main contributors to April’s fall in GDP, dropping by 0.3% in April, reflecting a substantial decrease (5.6%) in human health and social work, where there was a significant reduction in NHS Test and Trace activity.

Read more: Cost of living crisis: 13 top tips to save money on clothes and shoes

Construction also fell by 0.4% in April, following strong growth in March when there was significant repair and maintenance activity following the storms experienced in the latter half of February 2022.

Darren Morgan, director of economic statistics at the ONS, said: “A big drop in the health sector due to the winding down of the test and trace scheme pushed the UK economy into negative territory in April.

“Manufacturing also suffered with some companies telling us they were being affected by rising fuel and energy prices.

“These were partially offset by growth in car sales, which recovered from a significantly weaker than usual March.”

The Bank of England has warned of a "sharp economic slowdown" and concerns over a recession have been raised.

Production fell by 0.6%, driven by a fall in manufacturing of 1.0% on the month, as businesses continue to report the impact of price increases and supply chain shortages.

Barret Kupelian, senior economist at PwC, said the economy is now feeling the impact of the Ukraine war and surging prices.

"The economic data is now rapidly catching up with the cocktail of challenges businesses and consumers are facing, namely the war in Ukraine, high food and energy inflation and potential for further supply chain disruptions over trade tensions with the EU.

"We continue to expect the UK economy to grow by an average of 2-3% this year. However, this projection is artificially inflated by the poor performance of the economy in the beginning of last year. For most people the economic outlook will feel stagnant in the coming few months."

UK monthly economic growth. Infographic PA Graphics
UK monthly economic growth. Infographic PA Graphics

Chancellor Rishi Sunak said Britain was not alone in seeing a slowdown: “Countries around the world are seeing slowing growth, and the UK is not immune from these challenges.

“I want to reassure people, we’re fully focused on growing the economy to address the cost of living in the longer term, while supporting families and businesses with the immediate pressures they’re facing.”

But the UK economy is likely to stagnate in May and June, meaning a contraction in the second-quarter of this year, according to economic research institute NIESR.

Read more: UK households to go into recession in biggest hit since mid-1950s, warns CBI

“April’s headline 0.3% fall in GDP hid some strength in private services sectors: strong growth in retail, hospitality and other services suggests that some households may have been able to smooth their consumption in the face of the inflation shock," Rory Macqueen, principal economist at NIESR, said.

Manufacturing appears to be suffering as a result of the impact of high petrol and energy, with declines in eight out of 13 sub-sectors, but April’s overall decline was principally driven by the winding-down of the Test and Trace programme, which had made significant positive contributions to GDP over most of the COVID-19 period," he added.

Environment secretary George Eustice conceded there are “some real challenges ahead” after the UK economy declined in April.

Eustice was asked on Sky News whether it was time for the government to “stop maintaining that this is the fastest-growing economy in the G7” after the 0.3% fall in GDP in April.

The minister pointed to recovery from the pandemic and supply chain pressures as causes of the decline.

“We’ve known for some time this was going to be a challenge,” he said.

“We’ve got unemployment that’s at record lows, the lowest it’s been since 1974, but of course there are some real challenges ahead and these GDP figures are a reminder of those challenges.”

April’s fall in GDP puts the UK on the brink of recession, KPMG warned.

“The overall outlook remains downbeat as the squeeze on consumer income is expected to weaken demand, and external headwinds intensify due to the deteriorating outlook among the UK’s main trading partners," Yael Selfin, chief economist at KPMG UK, said.

Read more: UK government urged to prioritise business investment to avoid recession

“The rest of Q2 could see an additional fall in GDP owing to the weakening momentum and the impact of the extended bank holiday.“UK GDP fell by 0.3% in April, in part as a result of a fall in COVID-related health spending but also due to further supply chain disruptions and weakening demand.”

Alice Haine, personal finance analyst at Bestinvest, said: “In some ways, a GDP contraction of 0.3% in April was no surprise when you consider this was the month when consumer energy prices rose by 54% and taxpayers were hit by an increase in the national insurance rate and frozen pensions allowances.

“April also tied in with the damaging effects of Russia’s invasion of Ukraine on the UK’s cost of living, with the fallout coming just as the economy was picking itself up from the coronavirus pandemic.

“The latest GDP data from the ONS intensifies the likelihood of the UK heading for a prolonged period of stagflation — where an economy simultaneously experiences stagnant or low economic growth and high inflation.

Watch: What is a recession and how do we spot one?

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