UK economy unexpectedly shrinks in March as consumers cut back

Britain's economy expanded just 0.8 per cent in the first quarter, less than the 1 per cent forecast by economists. PHOTO: REUTERS

LONDON (BLOOMBERG) - The British economy unexpectedly contracted in March as the cost-of-living squeeze forced consumers to cut back on spending, throwing doubt on the Bank of England's ability to keep hiking interest rates and piling pressure on Prime Minister Boris Johnson's government to respond.

Gross domestic product fell 0.1 per cent from February, when growth was flat, the Office for National Statistics said on Thursday (May 12). It meant the economy expanded just 0.8 per cent in the first quarter, less than the 1 per cent forecast by economists.

While the quarterly growth takes output back above its pre-pandemic level for the first time, it is almost certain to mark the high point of the year, with the worst bout of inflation since the 1980s expected to see the economy rapidly lose momentum and possibly slide into recession.

The government is facing calls to provide more support for households amid warnings that another quarter of a million people will slide into destitution due to soaring energy and food costs. British Finance Minister Rishi Sunak is reported to be preparing a package of measures for the winter, which may be unveiled this summer.

Responding to the GDP figures, Mr Sunak said he recognised households were facing "anxious times", even though growth in the first few months of the year outpaced those of the United States, Germany and Italy.

"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," he said.

The impact of the British cost shock was evident in the GDP breakdown. In March alone, consumer-facing services dropped 1.8 per cent, driven by a sharp 2.8 per cent fall in wholesale and retail trade. The services sector and manufacturing both saw output shrink 0.2 per cent.

The British Chambers of Commerce (BCC) responded with another call for an emergency budget to deal with the living standards crisis.

"Markedly slower growth confirms an alarming loss of momentum," said Mr Suren Thiru, BCC head of economics. "Against this backdrop, the Bank of England's recent decision to raise interest rates continues to look like a misstep."

The Resolution Foundation think-tank said "the risk of stagflation looms", while Capital Economics warned that "the risk of recession is rising".

The March GDP reading was also affected by the winding down of the National Health Service's Test and Trace and vaccination programmes, which knocked 0.2 percentage point off growth, as activity slowed from levels seen in the Omicron outbreak.

Quarter on quarter, there was disappointment in trade and business investment. The total trade in goods and services deficit, excluding precious metals, widened by £14.9 billion (S$25.3 billion) to £25.2 billion, the largest deficit since records began in 1997. Exports fell and there was a big rise in imports, meaning net trade acted as a significant drag on growth.

Business investment fell by 0.5 per cent and remains 9.1 per cent below its pre-pandemic levels. The level is lower than the Bank of England forecast last week.

Bloomberg Economics expects the economy to contract in the second quarter after households were hit by a surge in energy bills and a tax increase in April. An extra public holiday will also hit output.

Further pain looms in October, when the Bank of England expects utilities to increase gas and electricity bills by a further 40 per cent.

The central bank last week forecast that inflation would exceed 10 per cent in October, five times its target, and policymakers are in the midst of one of their fastest-ever tightening cycles to bring price gains under control.

Still, that spells bad news for future growth, with the Bank of England predicting that the economy will barely expand at all across 2023 and 2024.

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