Britain’s economy contracted in March, continuing the poor performance of the previous month as manufacturing slowed and the dominant service sector slumped as households braced for rising costs of living.
The trade deficit also widened in the first quarter to the highest level since records began in 1955 as exports fell while imports surged.
Gross domestic product fell 0.1% between February and March, data from the Office for National Statistics showed on Thursday, below the unchanged forecast of economists polled by Reuters.
It follows the stagnation of the previous month – a downward revision from an initial reading of 0.1% expansion.
Emma Mogford, fund manager at Premier Miton Investors, said: “The contraction in March is a worrying data point as it signals that the economy has started to weaken even before the cost of living crisis hit. reaches its peak.”
For the first quarter as a whole, the UK economy grew by 0.8% over the previous three months, boosted by stronger growth in January. However, that was below analysts’ expectations of 1% and down from the 1.3% increase in the prior quarter.
James Smith, research director at the Resolution Foundation think tank, said “the economy already appears to be losing momentum as the cost of living crisis intensifies and the risk of stagflation looms.”
Inflation is expected to pick up further from its 30-year high last month as energy costs soared following Russia’s invasion of Ukraine.
Smith warned of ‘clear’ recession risks as average wages are set to fall by £1,200 this year and urged the government to ‘provide additional targeted support to low and middle income households who will be most affected’ .
Chancellor Rishi Sunak said: “Our recovery is disrupted by Putin’s barbaric invasion of Ukraine and other global challenges, but we continue to help people where we can.”
On a quarterly basis, comparable to other countries, the UK economy has now recovered to 0.7% above its pre-pandemic level, slightly above the 0.4% of the euro zone, but below France and the United States.
Samuel Tombs, an economist at consultancy Pantheon Macroeconomics, said he expected GDP to contract 0.4% in the second quarter as healthcare spending fell and consumers tightened their belts. The Bank of England predicts the economy will alternate between near-stagnation and contraction over the next two years, with output barely changing in the first quarter of 2024.
The pound, an indicator of the UK’s relative macroeconomic performance, fell 0.5% on Thursday and continues to trade near pandemic-era lows against the dollar.
Despite the weak economic outlook, markets expect the BoE to raise its main interest rate from the current 1% to 2% by the end of the year.
The UK’s trade deficit for goods and services widened to a record 5.3% of nominal GDP in the first quarter, the largest on record, as imports rose 9.3%, reflecting largely the rise in energy prices, while exports fell 4.9%. The decline in exports was broad-based with contractions in machinery, cars and fuel, as well as financial and business services.
Business investment fell 0.5% in the first quarter and was 9.1% lower than its pre-pandemic level as well as 8% lower than in the first quarter of 2016, before the referendum on the Brexit in the UK, reflecting high business uncertainty. . Investment is important for productivity growth, which ultimately drives wage growth and living standards.
March’s decline in output was driven by significant contractions in retail and wholesale trade, which fell 2.8%. The continued reduction in the coronavirus testing and tracing service and vaccination programs also dampened growth, but was offset by increased doctor appointments.
Other services have continued to recover from the effects of Covid-19, including hospitality, transport, employment agencies and travel agencies. Computing has also experienced strong growth.
But overall activity in the services sector, which accounts for 80% of the UK economy, fell 0.2% on the month and was the main contributor to the drop in GDP in March.
Manufacturing output also fell 0.2% in the month, with contractions across many industries including pharmaceuticals, chemicals and fashion.
By contrast, construction had a strong month, up 1.7%, which the ONS attributed to repair work after February storms.