UK economy unexpectedly contracts in March

The British economy unexpectedly contracted 0.1% in March after a drop in car sales due to supply chain problems, marking a weak end to the first quarter of a year in which the recession risk.

The UK’s gross domestic product grew 0.8% in the first three months of 2022, the Office for National Statistics said.

This was below the 0.9% forecast by the Bank of England and the 1% expected on average by economists polled by Reuters.

Despite falling short of expectations, growth between January and March is likely to mark a high point for the year as consumer spending faces its biggest contraction in decades.

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

“The economy had less momentum than we thought even before the full blow of the cost-of-living crisis was felt. Recession risk has just increased,” said Paul Dales, chief UK economist at Capital Economics.

The UK government is under pressure to provide more support to households to cope with skyrocketing bills for energy and other essentials that have already caused a near-record drop in consumer confidence.

“Our recovery is being interrupted by Putin’s barbaric invasion of Ukraine and other global challenges, but we continue to help people where we can,” Finance Minister Rishi Sunak said after today’s data.

Britain, unlike some of its European neighbors, has limited direct trade links with Russia but is hit hard by rising energy prices in Europe, which were already high even before the February 24 invasion. .

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

The world’s fifth-largest economy shrank a historic 9.3% in 2020 and grew 7.4% in 2021, the largest change in output of any G7 economy during the Covid-19 pandemic.

Headline GDP, on a monthly basis, is now 1.2% above its pre-COVID-19 level in February 2020.

However, much of the recovery reflects higher health care spending, up 11% since the start of the pandemic, while consumer services are still 7% below their pre-pandemic level.

In March alone, auto and motor vehicle sales plunged 15.1%, leading to a 0.2% drop in overall service output.

The drop in GDP would have been even larger had it not been for an unusually strong 1.7% rise in construction output, reflecting repair work after the winter storms in February.

Earlier this week, Britain’s 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 predicted that Britain would experience the weakest growth and highest inflation of any major advanced economy next year.

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