Sunday, June 26, 2022

Recession fears mount as UK economy shrinks 0.3% in April

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The UK was headed for recession as the economy unexpectedly contracted in April as prices for essential goods, rising interest rates and fuel costs rose to record highs.

Experts said the data is now catching up with the “cocktail of challenges” the UK is facing, with the potential for more problems as trade relations with the EU deteriorate.

Official figures showed that gross domestic product (GDP) – a measure of all goods and services produced – fell 0.3 percent in April after contracting 0.1 percent in March and showing no growth in February.

In April, domestic energy bills rose 54 percent while workers were hit by an increase in Social Security. Meanwhile, food and fuel prices have skyrocketed after supplies were severely disrupted as a result of the Russian invasion of Ukraine.

The Office for National Statistics said on Monday that Britain’s GDP is now 0.9 percent above pre-pandemic levels but 0.4 percent below the peak reached in January. Experts had expected GDP to increase by 0.1 percent in April.

The ONS said it was the first time GDP had fallen two straight months since March and April 2020, when the pandemic first struck and crashed the economy.

In the service sector, which accounts for more than three-quarters of the UK economy, production shrank by 0.3 percent. This was mainly due to the end of the government’s Covid-19 test and trace program and reduced vaccination activity.

The end of free testing reduced GDP by 0.5 percentage points. Excluding the impact of testing and trace and vaccines, production would have risen 0.1 percent in April, the ONS said.

Activity also declined in the other two major sectors of the economy. Manufacturing shrank 1 percent as companies reported being hit hard by sharp price hikes and delays in deliveries. Construction output fell by 0.4 percent.

Last week, the OECD’s Wealthy Nations Club released forecasts that next year the UK would fall behind all other advanced economies except Russia as growth plummets to zero.

Analysts were divided on whether the UK will avoid a recession, defined as two-quarters negative economic growth.

Martin Beck, chief economic advisor to the EY Item Club, said the outlook is bleak.

“An already severe squeeze on household spending power is being negatively impacted by the inflationary impact of global supply chain frictions and recent sterling weakness.

“And UK interest rates are likely to rise again later this week,” he said.

The Bank of England is expected to announce its latest interest rate decision on Thursday, with markets anticipating further increases.

The bank’s Monetary Policy Committee (MPC) is trying to tame inflation, which is expected to hit 10 percent later this year, well above the 2 percent target rate.

Further increases will continue to weigh on household budgets and are expected to slow consumer spending, which will weigh on the broader economy.

Samuel Tombs, UK chief economist at Pantheon Macroeconomics, said private sector activity had helped offset a sharp contraction in Covid-related government spending and “renewed weakness” in manufacturing. However, a recession remains unlikely, he said.

“Households’ real disposable income should rise in both the third and fourth quarters after the Chancellor announced an additional £5bn in grants for those quarters, almost a percent of her expected income in those quarters.

“Unless energy prices rise further and households are prudent in drawing on their savings, we expect quarterly GDP growth to be around 0.6 percent in the third quarter and 0.5 percent in the fourth quarter,” he added.

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