The UK economy shrank 0.1% in March and the situation is expected to worsen as the country’s cost of living crisis escalates.
Tim Ireland | Xinhua Press Agency | Getty Images
LONDON — Growth is slowing in the UK after the economy contracted 0.1% in March, with economists expecting further contraction this year.
While the economy grew 0.8% in the first quarter as a whole, slightly below consensus expectations for 1% growth, January was the only positive month of the quarter. The war in Ukraine and subsequent supply chain problems and spikes in energy prices have exacerbated the toll of inflation, which has been high for decades.
The pound hit a two-year low against the US dollar after the data as traders consumed growing uncertainty about the UK’s economic outlook.
The surprising monthly contraction in March — economists had expected the figure to level up — gives Prime Minister Boris Johnson’s government a concern as the country’s cost-of-living crisis has not yet reached its peak.
“It’s only going to get worse for consumers in the end. Energy bills are expected to rise again later this year as the price cap is reassessed, while inflation proves to be stickier than expected,” said Hinesh Patel, portfolio manager at Quilter Investors.
UK inflation hit a 30-year high of 7% in March and in April the country’s energy regulator raised its price cap by 54% to cushion rising prices. In the Queen’s Speech marking the opening of parliament on Wednesday, the government pledged to focus on economic growth to tackle the rising cost of living.
Patel added that the Bank of England now faces an “almost impossible task to lead the economy out of this quagmire”.
“They are currently in an aggressive rate-raising mode, but this cannot last long given the economic problems that are already starting to materialize,” he added.
The Bank of England has raised interest rates in four consecutive policy meetings to curb inflation, and markets are anticipating another five rate hikes in the spring of 2023.
However, James Smith, developed markets economist at ING, suggested that the central bank’s more cautious tone in recent weeks suggests it will fall short of these expectations, possibly settling for a few more hikes before pausing to prevent further downside. to exert pressure. on economic growth.
Thursday’s GDP figures also showed that the dominant consumer-focused services sector in the UK took a major hit in March, falling 1.8% as consumer spending fell amid pressure on households.
Health expenditures are falling away
ING’s Smith said a second consecutive decline in production should be expected in April, coinciding with the end of free Covid-19 testing.
“Surprisingly, health output actually increased in March, despite the continued winding down of Covid-related activities, but it is clear that this will not last long,” Smith noted.
“Health spending has been a major driver of GDP during the pandemic, and in fact the overall size of the economy would be about 1% smaller if output in this sector were flat since early 2020.”
Caroline Simmons, UK Chief Investment Officer at UBS Global Wealth Management, also looked cautiously ahead.
“There is growing potential for negative UK GDP in the second quarter, partly due to consumer pressures from rising energy prices,” she said.
UK equities isolated
With concerns about the growth prospects mounting in the coming quarters, 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 a rise in the FTSE 100 index with a target of 8100 in December; the FTSE was trading around 7172 mid-morning Thursday.
Importantly for the UK, both labor demand and companies’ investment intentions are holding up, mitigating the risk of a sharp decline in overall growth, said Daniel Casali, chief investment strategist at Tilney Smith & Williamson.
The Bank of England expects growth to be flat in the second quarter, although Casali also noted the potential for a modest contraction.
“For investors, given that the UK’s large-cap companies get most of their sales abroad, it’s really global growth that matters,” added Casali.
The IMF recently lowered its global growth forecast to 3.6% for 2022 and 2023, from 6.1% last year.
“Together with the energy sector’s strong earnings per share, the outlook for corporate earnings in the UK has improved. The consensus forecasts growth in earnings per share of 15% for 2022, up from just under 3% at the start of the year,” Casali added.
“At the very least, rising corporate earnings (and cheap valuations) should limit the downward trend in UK equities in the current volatile market conditions.”