The UK economy shrank 0.1% in March and the situation is expected to worsen as the cost of living crisis intensifies.
Tim Ireland | Xinhua News Agency | Getty Images
LONDON — A slowdown in growth is underway in the UK after the economy contracted 0.1% in March, with economists expecting further contractions this year.
Although the economy grew 0.8% for the first quarter as a whole, slightly below the consensus growth forecast of 1%, January was the only positive month in the quarter. The war in Ukraine, supply chain problems and the resulting spikes in energy prices have worsened the toll of inflation, which is at its highest level in several decades.
The pound hit a two-year low against the US dollar on the data as traders digested growing uncertainty over the UK’s economic outlook.
The surprise monthly contraction in March – economists had expected the figure to be flat – has Prime Minister Boris Johnson’s government worried as the country’s cost of living crisis has yet to peak.
“Ultimately, things will only get worse for consumers. Energy bills are expected to climb further later this year when the price cap is reassessed, while inflation proves more sticky than expected” , said Hinesh Patel, portfolio manager at Quilter Investors.
Inflation in the UK hit a 30-year high of 7% in March and in April the country’s energy regulator raised its price cap by 54% to adjust to soaring prices. In the Queen’s Speech to mark the official opening of parliament on Wednesday, the government promised to focus on economic growth to tackle the spiraling cost of living.
Patel added that the Bank of England now faces an “almost impossible task of managing the economy out of this quagmire”.
“They’re in aggressive rate hike mode at the moment, but that can’t stay that way for long given the economic issues that are already starting to play out,” he added.
The Bank of England has raised interest rates in four consecutive policy meetings as it seeks to contain inflation, and markets are forecasting five more hikes by spring 2023.
However, James Smith, developed markets economist at ING, suggested that the central bank’s more cautious tone in recent weeks indicates that it will fall short of those expectations and could settle for a few more hikes before making a move. a pause so as not to exert further downward pressure. on economic growth.
Thursday’s GDP figures also showed Britain’s dominant consumer services industry took a hit in March, falling 1.8% as consumer spending fell amid pressure on consumers. households.
Falling healthcare spending
ING’s Smith said a second consecutive drop in output should be expected in April, coinciding with the end of free Covid-19 testing.
“Amazingly, sanitary production actually increased in March despite the continued reduction in Covid-related activity, but it is clear that this is unlikely to last,” noted Smith.
“Healthcare spending has been a key driver of GDP during the pandemic, and in fact the overall size of the economy would be around 1% lower if output in this sector had remained flat since the start of 2020.”
Caroline Simmons, UK investment director at UBS Global Wealth Management, was also cautious going forward.
“There is a growing potential for UK GDP to be negative in the second quarter, which is partly due to pressure on consumers from rising energy prices,” she said.
UK stocks isolated
As concerns about growth prospects over the next few quarters grow, investors are also considering the impact this could have on markets.
However, Simmons noted that the UK economy is not representative of the UK stock market. UBS sees FTSE 100 index higher with December target of 8,100; the FTSE was trading around 7172 by mid-morning on Thursday.
Importantly for the UK, labor demand and business investment intentions remain firm, reducing the risk of a sharp slowdown in overall growth, according to Daniel Casali, chief investment strategist. investments at Tilney Smith & Williamson.
The Bank of England expects growth to be flat in the second quarter, although Casali also noted that there is potential for a modest contraction.
“For investors, given that UK-listed large-cap companies do the bulk of their sales overseas, it’s really global growth that matters,” Casali added.
The IMF recently cut its global growth forecast to 3.6% for 2022 and 2023, down from 6.1% last year.
“Alongside strong EPS gains by the energy sector, the outlook for UK corporate earnings has improved. Consensus calls for earnings per share growth of 15% for 2022, a strong recovery from just a little less than 3% at the start of the year,” Casali added.
“At the very least, rising corporate earnings (and cheap valuations) should limit the decline in UK equities in the current volatile market conditions.”