EconomyUK economy shrinks in March as manufacturing and services...

UK economy shrinks in March as manufacturing and services falter

The UK economy contracted in March, continuing the poor performance of the previous month as manufacturing slowed and the dominant services sector faltered as households braced for rising living costs.

The trade deficit also widened in the first quarter to the largest since records began in 1955 as exports fell while imports surged.

Gross domestic product declined 0.1 per cent between February and March, data published by the Office for National Statistics showed on Thursday, below the no change forecast by economists polled by Reuters.

It follows stagnation in the previous month — a downward revision from an initial reading of 0.1 per cent expansion.

Emma Mogford, a fund manager at Premier Miton Investors, said: “The contraction in March is a concerning data point as it signals the economy had started to weaken even before the cost of living crisis reached its peak.”

Line chart of GDP index rebased, Feb 2020=100 showing The UK economy has stalled in the last two months

Over the first quarter as a whole, the UK economy expanded 0.8 per cent over the previous three months, boosted by stronger growth in January. However, that was below analysts’ expectations of 1 per cent and down from the 1.3 per cent increase in the previous 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 set to accelerate further from its 30-year high last month as energy costs have soared following Russia’s invasion of Ukraine.

Smith warned of “clear” recession risks as average pay packets are expected to fall by £1,200 this year and urged the government to “provide further targeted support to the low- and-middle income households who will be worst affected.”

Chancellor Rishi Sunak said: “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.”

On a quarterly base, which is comparable with other countries, the UK economy has now recovered to 0.7 per cent above its pre-pandemic level, marginally above the 0.4 per cent for the eurozone, but below France and the US.

Samuel Tombs, economist at consultancy Pantheon Macroeconomics, said he expected GDP to contract by 0.4 per cent in the second quarter as health spending declines and consumers tighten their belts. The Bank of England forecasts the economy to alternate between near stagnation and contraction over the next two years, with output barely changed by the first quarter of 2024.

The pound, a bellwether of the UK’s relative macroeconomic performance, dropped 0.5 per cent 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 per cent to 2 per cent by the end of the year.

The UK’s trade deficit for goods and services widened to a record 5.3 per cent of nominal GDP in the first quarter, the largest on record as imports rose by 9.3 per cent, largely reflecting higher energy prices, while exports fell by 4.9 per cent. The fall in exports was broad based with contractions in machinery, cars and fuels, as well as financial and business services.

Business investment fell by 0.5 per cent in the first quarter and was 9.1 per cent below its pre-pandemic level as well as 8 per cent below the that of the first quarter of 2016, before the Brexit referendum in the UK, reflecting high business uncertainty. Investment matters for productivity growth, which ultimately drives wage growth and standards of living.

Line chart of GDP index rebased, Q4 2019=100 showing The UK economic recovery from the pandemic is on a par with the eurozone

The drop in output in March was driven by large contractions in retailing and wholesaling, which were down 2.8 per cent. The continuing scaling back of the coronavirus test and trace service and vaccination programmes were also a drag on growth but were offset by rising doctors’ appointments.

Other services continued to recover from the effects of Covid-19, including hospitality, transport, employment agencies and travel agencies. There was also strong growth in IT.

But, overall, activity in the services sector, which accounts for 80 per cent of the UK economy, slipped 0.2 per cent on the month and was the main contributor to March’s fall in GDP.

Manufacturing production also fell on the month, by 0.2 per cent, with contractions in many industries — including pharmaceuticals, chemicals and fashion.

In contrast, construction recorded a strong month, up 1.7 per cent, which the ONS attributed to repair work after February storms.

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