The economy went into reverse in March as surging prices fuelled by the war in Ukraine threaten to plunge Britain into recession.
GDP fell by 0.1pc over the month after growth for February was revised down to zero, according to the ONS. On a quarterly basis, the economy grew 0.8pc – behind forecasts.
The services sector was the biggest drag on the economy as consumer-facing services suffered a slide in sales.
The figures highlight the looming threat of a recession as soaring inflation puts a squeeze on household budgets, and comes even before April’s 54pc surge in energy bills.
Reaction: UK faces ‘serious fight’ to avoid recession
Ed Monkat Fidelity International warns the UK is facing three years of stagnation, with the threat of a recession mounting.
Any momentum the UK economy had as it emerged from the pandemic appears to be ebbing away. Growth in the first quarter of 0.8pc was below forecast and is down from 1.3pc in the preceding period, and the month-on-month figures now show a worrying slowdown.
From growing by 0.7pc in January, the economy flat-lined in February and fell slightly in March. Numbers can be revised but it’s clear the UK faces a serious fight to avoid recession this year.
Soaring energy, fuel and food prices continue to eat into household budgets. And while some are already having to choose between basic necessities, this is unlikely to be the end of the squeeze.
With inflation reaching 7pc households are navigating largely unfamiliar financial territory while also trying to prepare for the likelihood that bills will rise still further.
Despite government promises this week to address the cost of living challenge, the threat of recession appears to be growing. By the end of the second quarter of 2025 the UK economy is expected to be barely bigger than it is today.
The Bank of England has so far been focused on bringing inflation down in the medium term via rate rises. It must now also factor in an economy at risk of shrinking earlier than it has forecast as well.
ING: Covid spending props up economy
Here’s some interesting analysis from James Smith, developed markets economist at ING.
He points out that GDP would be 1pc lower today if it weren’t from the recent boom in health spending, driven by Covid testing and vaccines.
Surprisingly, health output actually increased in March despite the ongoing wind-down of Covid-related activities, but clearly, that’s unlikely to last.
Health spending has been a key driver of GDP through the pandemic, and in fact, the overall size of the economy would be around 1pc smaller had output in this sector stayed flat since early-2020.
Reaction: Outlook ‘increasingly fraught’
Yael Selfin, chief economist at KPMG UK, says the economy is at growing risk of a recession.
The outlook looks increasingly fraught. While we do not yet see a recession coming this year, weak growth means that additional shocks or spillovers from other economies make this scenario increasingly likely.
The squeeze on consumers has tightened from the second quarter of this year, with the increase in energy tariffs and the higher cost of food and other commodities arising from the conflict in Ukraine, pushing up the cost of living.
At the same time, tighter financial conditions and rising interest rates have seen the cost of borrowing increase.
Reaction: The UK will underperform next quarter
Samuel Tombs at Pantheon Macroeconomics points out that the UK put in mid-table performance compared to its G7 peers in the first quarter.
That’s thanks largely to the effects of the energy price cap, which shielded households from some of the surge in prices.
But now this has risen, he warns the UK is set to lag behind over the second quarter.
CBI: Times will get even tougher
Rain Newton-Smith, chief economist at the CBI, says businesses are braced for the situation to get worse.
The economy barely kept its head above the water during a volatile start to the year, but times look set to get that bit tougher.
Cost pressures and rising prices have tightened their grip, with both businesses and households feeling the pinch. The end result is a weaker economic outlook
It’s clear that the most vulnerable households and energy-intensive businesses may need further support, so the government should keep this under review.
Services sector drags down economy
My colleague Tim Wallace has dug into the numbers:
The biggest drop by services sector in March came in wholesale and retail trade and the repair of vehicles, which plunged by more than 15pc in March. The ONS noted chaos in global supply chains has stunted the delivery of components for car manufacturers, limiting the number of vehicles they can produce and forcing up prices.
However, personal services picked up while health and social work also grew by 1.5pc on the month, with the return of more GP appointments and A&E care pushing up output, indicating the availability of public services, rather than active choices by consumers, is offering the key prop to the figures.
Meanwhile, manufacturing output fell 0.2pc in March, with a slump of more than 5pc in pharmaceuticals, 4.1pc in textiles and 3.5pc in chemicals.
The construction industry managed to grow by 1.7pc on the month, with strong demand for maintenance work on homes, as well as for new commercial property.
Over the first quarter of the year as a whole, GDP grew by 0.8pc as the economy recovered from the omicron wave over winter, before the war in Ukraine sent already high inflation spiralling further, largely through a leap in costs of goods such as petrol.
For the three months to March, the recovery in hospitality combined with growth in information and communications, and transport and storage was enough to offset to hit to retail to keep the services sector growing.
ONS: GDP falls in March
Darren Morgan, ONS Director of Economic Statistics, said:
The UK economy grew for the fourth consecutive quarter and is now clearly above pre-pandemic levels, although growth in the latest three months was the lowest for a year.
This was driven by growth in a number of service sectors as the economy continued to recover from Covid-19 effects, including hospitality, transport, employment agencies and travel agencies. There was also strong growth in IT.
There were, though, some downward effects from other services, including retailing, wholesaling and car sales and also health, due to continuing decreases in the Test and Trace service and vaccination programmes.
Our latest monthly estimates show GDP fell a little in March, with drops in both services and in production. Construction, though, saw a strong month thanks partly to repair work after the February storms.
UK heads for recession
There a more worrying signs that the UK could be headed for a recession after the economy shrank in March.
GDP fell 0.1pc after February’s growth was revised down to zero, according to the ONS.
The figures, which come even before April’s massive surge in energy bills, highlight the risk of an economic downturn as rising prices continue to batter households.
The services sector was the biggest drag on the economy, with consumer-facing sectors such as retail suffering a slide in sales.
5 things to start your day
1) Germany gas supply drops as Ukraine shuts off pipes from Russia Olaf Scholz forced to import extra fuel from Norway and Netherlands
2) Passengers will bear the brunt of Heathrow’s rising landing fees Heathrow accuses airlines of trying to ‘protect their own profits’
3) Millions of electricity customers launch class action lawsuit against cable ‘cartel’ Cable companies Nexans, NKT and Prysmian face accusations of overcharging British households
4) Tesco to open offices in its supermarkets Grocer seeks to cash in on rise of homeworking
5) Disney beats Netflix as streaming service adds new subscribers Disney+ adds customers despite Wall Street concerns over cost-of-living crisis
What happened overnight
Hong Kong stocks opened lower on Thursday after overnight drops on Wall Street.
The Hang Seng Index tumbled 1.35pc, or 267.68 points, to 19,566.89.
Mainland China’s Shanghai Composite Index fell 0.45 percent, or 13.90 points, to 3,044.80, while the Shenzhen Composite Index plummeted 0.64 percent, or 12.33 points, to 1,906.18.
Tokyo also stocks fell in early trade on Thursday as investors fret over inflation.
The benchmark Nikkei 225 index fell 1.34 percent, or 350.51 points, to 25,863.13 in early trade, while the broader Topix index gave up 0.79 percent, or 14.59 points, to 1,836.56.
Coming up today
- Corporate: BT, 3i (full-year results); Grainger (interims); Balfour Beatty, Coca-Cola HBC, Convatec Group, RHI Magnesita, Superdry (trading statement)
- Economics: GDP (UK), manufacturing production (UK), industrial production (UK), producer price index (US), jobless claims (US)