UK economy unexpectedly shrinks in March as recession risk looms

2/2

© Reuters. FILE PHOTO: People walk and stand by a temporary fence around Trafalgar Square to prevent crowds from gathering on New Year’s Eve in London, England, December 31, 2021. Reuters/May James

2/2

David Milliken and William Schomberg

LONDON (Reuters) – Britain’s economy unexpectedly shrank 0.1% in March, marking the end of a weak first quarter with looming recession risks, as car sales slumped due to supply chain problems.

Gross domestic product grew 0.8% in the first three months of 2022, the ONS said, below the Bank of England’s 0.9% forecast and the 1.0% average forecast by economists polled by Reuters.

Although weaker than expected, the January-March increase could mark a high for the year as consumer spending faces its biggest contraction in decades.

Last week, the Bank of England forecast inflation to be above 10% in the final quarter of the year, up from 7% in March and already more than triple its 2% target.

Paul Dales, chief U.K. economist at Capital Economics, said: “Even before the full blow of the cost of living crisis is fully felt, the economy has less momentum than we thought. The risk of a recession has just risen.”

Prime Minister Boris Johnson’s government is under pressure to provide more support to households to tackle soaring energy and other essentials bills that have led to a near-record drop in consumer confidence.

“Our recovery is being disrupted by (Russian President Vladimir) Putin’s brutal invasion of Ukraine and other global challenges, but we will continue to help people within our means,” Finance Minister Rishi Sunak said on Thursday data after.

sluggish consumption

Unlike some of its European neighbors, the UK has limited direct trade relations with Russia, but it has been severely affected by soaring energy prices in Europe, which were high even before the February 24 invasion.

The Bank of England has raised interest rates four times since December and is likely to raise rates further this year to keep inflation in check.

The world’s fifth-largest economy contracted by a historic 9.3% in 2020 and expanded by 7.4% in 2021, the most output volatility of any G7 economy during the COVID-19 pandemic.

On a monthly basis, headline GDP is now 1.2% above February 2020 pre-pandemic levels.

However, much of the recovery reflects increased health care spending — up 11% since the start of the pandemic — while consumer services remain 7% below pre-pandemic levels.

In March alone, sales of cars and motor vehicles fell 15.1%, leading to a 0.2% decline in overall service output.

The decline in GDP would have been even greater had it not been for the unusually strong 1.7% rise in construction output due to maintenance work following the winter storm in February.

On Wednesday, the National Institute for Economic and Social Research (NIESR), a think tank, forecast that GDP would fall in the third and fourth quarters, meeting the technical definition of a recession.

Last month, the International Monetary Fund forecast that Britain’s growth next year will be the weakest and most inflationary of any major advanced economy.

Source link