UK economy shrinks 0.3% as Covid testing ends

The UK economy contracted for the second month in a row in April, falling by 0.3 per cent, official figures showed on Monday. It added to fears of a slowdown three days before the Bank of England announces the scale of its latest interest rate response to the surge in inflation.

All three main sectors suffered a fall in output for the first time since January 2021, the Office for National Statistics (ONS) said. April’s drop in gross domestic product was also the biggest contraction since January 2021 and comes after a fall of 0.1 per cent in March.

However, households showed signs of resilience despite higher inflation. Consumer-facing industries expanded 2.6 per cent in the month, led by a strong rise in retail sales. The figures may indicate that consumers are reacting slowly to a 54 per cent increase in energy bills that hit in April and a government increase in payrolls taxes. Recent data point to households cutting back on non-essentials items.

An extra bank holiday for Queen Elizabeth II’s platinum jubilee means Britain may dodge a technical recession — two consecutive quarters of falling output — but it could come close. This marks the third month in which GDP has not grown, a clear sign that the economy is weakening rapidly in the face of inflationary pressures.

The precarious state of the economy presents a headache for both Bank of England Governor Andrew Bailey and Prime Minister Boris Johnson. With inflation set to peak in double digits in October, when energy bills are due to surge again, Mr Bailey and his colleagues have little option but to keep raising interest rates, even if means making the cost of living crisis worse in the short run.

They are worried about the risk of a 1970s wage-price spiral unless inflation is brought under control. Policymakers are expected to deliver a fifth straight rate increase on Thursday. A quarter-point move, as forecast, would take the benchmark rate to 1.25 per cent, the highest since 2009, and money markets are now pricing in rates climbing above 3 per cent next year.

April’s data showed output contracted by 0.3 per cent in the main services sector, largely due to the ending of the government’s Covid-19 Test-and-Trace programme and lower vaccination activity. With the impact of the programme and vaccines stripped out, GDP would have risen by 0.1 per cent in April, the ONS said.

But there were also declines in the manufacturing and construction sectors, down 1 per cent and 0.4 per cent in April respectively, with manufacturers, in particular, noting the impact of increasing prices and supply chain woes.

Darren Morgan, director of economic statistics at the ONS, said: “A big drop in the health sector due to the winding down of the test and trace scheme pushed the UK economy into negative territory in April. “Manufacturing also suffered with some companies telling us they were being affected by rising fuel and energy prices.

“These were partially offset by growth in car sales, which recovered from a significantly weaker-than-usual March.” Alice Haine, personal finance analyst at online investment platform Bestinvest, said: “The latest GDP data from the ONS intensifies the likelihood of the UK heading for a prolonged period of stagflation — where an economy simultaneously experiences stagnant or low economic growth and high inflation.

“With inflation hitting 9 per cent in April and expected to hit double digits in the fourth quarter, amid surging food, fuel and energy prices, it is only natural to expect households to rein in their spending as they strive to meet their monthly financial obligations,” she said.

“Low consumer sentiment was evident in the run-up to the weekend when the ONS Opinions and Lifestyle Survey found that 77 per cent of adults reported feeling worried about rising costs of living with women, people with disabilities and those on low incomes particularly concerned about how to meet their household bills.”

The latest ONS figures add weight to the Organisation for Economic Co-operation and Development's recent gloomy outlook that the UK economy will grind to a halt next year amid rampant inflation and tax rises and become the worst-performing country in the G20, apart from Russia, which is hobbled by western sanctions, Ms Haine said.

Environment Secretary George Eustice, the government minister on the daily media round, conceded that there are “some real challenges ahead”. Mr Eustice was asked on Sky News whether it was time for the government to “stop maintaining that this is the fastest-growing economy in the G7”.

He pointed to the recovery from the Covid-19 pandemic and supply chain pressures as causes of the decline. “We have known for some time this was going to be a challenge,” he said. “We have got unemployment that is at record lows, the lowest it has been since 1974, but, of course, there are some real challenges ahead and these GDP figures are a reminder of those challenges.”