The UK economy shrank by 0.1% in March, according to the latest report from the Office of National Statistics (ONS) reported today.
The ONS confirmed that GDP fell by 0.1% in March after no growth in February, revised down from 0.1% growth, however the economy grew by 0.8% overall in Q1 2022.
“The UK economy has now recovered to its pre-pandemic level, but momentum seems to be ebbing away, and recessionary forces are gathering. GDP came in at 0.8% for the first quarter of the year, a little below forecasts,” said AJ Bell head of investments analysis Laith Khalaf.
“What is more concerning is that almost all of the growth was registered in January, and March actually saw a 0.1% fall in GDP.”
The ONS said services fell by 0.2% month-on-month and was the central contributor to the fall in GDP last month, reflecting a significant 15.1% decline in the wholesale and retail trade, repair of motor vehicles and motorcycles sector.
The report also highlighted a 0.2% slide in production, which was slightly offset by a 1.7% growth in construction.
Consumer-facing services output fell by 1.8%, following a 0.5% growth in February, with a 0.2% growth in non-consumer facing services after a 0.1% fall month-on-month.
“Household expenditure was still positive in the first quarter, as consumers took advantage of new found freedoms to go out and spend money in shops, restaurants and hotels,” said Khalaf.
“But that was really the calm before the storm, as higher energy prices and taxes kicked in from April.”
“The retail and wholesale trade saw itself going backwards in the first quarter, with new car sales still struggling as a result of global supply issues.”
The ONS confirmed that monthly GDP was now 1.2% above its pre-Covid-19 level, while services was now 1.5% over its February 2020 level and construction had grown 3.7% since before the coronavirus.
Production declined 1.6% past its pre-Covid-19 rate, while consumer-facing services saw a 6.8% slide and all other services were 3.6% higher than their pre-February 2020 levels.
Analysts warned that the UK seems set on the road to inflation, with 2023 anticipated to bring unwelcome harsher times for the national economy.
“On top of higher energy prices and taxes, the UK economy now also has to deal with rising interest rates, which will serve to further dampen activity. Recession risk is therefore elevated, and while growth is still expected this year, 2023 looks like it will be more challenging economically,” said Khalaf.
“The markets are already looking forward to next year with some trepidation, which explains why we have seen significant falls in the pound and the FTSE 250 since the start of the year.”
The Central Bank of England recently hiked interest rates 0.25% to 1%, with experts projecting a rise to 1.25% at the next Bank meeting this summer. However, it has proven a fine balancing act for the institution to relieve a certain degree of inflationary pressure in the economy without sending the UK into a full-blown recessionary tilt.
“The central bank is raising rates to try to take some of the steam out of the labour market, to prevent an inflationary wage spiral, but clearly there is a risk the rate setting committee pushes too hard,” said Khalaf.
“Controlling the economy through tightening monetary policy is a bit like trying to move a brick with a piece of elastic. It’s hard to apply precisely the right amount of force and avoid the brick hitting you square in the face.”
