Britain’s economy unexpectedly contracted in March but grew in the first quarter as a whole, although slower than expected, official figures showed Thursday, as retailers and manufacturers were hurt by supply disruptions and higher prices, raising concerns that the country may be headed for a recession.
The gross domestic product (GDP) shrank by 0.1% in March but expanded by 0.8% over the first three months of this year, the Office for National Statistics (ONS) said in a statement, slowing from 1.3% in the previous quarter.
The first-quarter reading came in below the 0.9% forecast by the Bank of England (BoE) and the 1% expected on average by economists.
Despite falling short of expectations, the growth between January and March is likely to mark a high point for the year, with consumer spending facing its biggest squeeze in decades.
Last week, the BoE forecast inflation will go above 10% in the final quarter of the year, up from 7% in March, which was already more than three times its 2% target.
"The economy had less momentum than we thought even before the full hit from the cost of living crisis has been felt," said Paul Dales, chief U.K. economist at Capital Economics. “The risk of recession has just risen.”
Prime Minister Boris Johnson's government is under pressure to provide more support to households to tackle soaring bills for energy and other essentials that have already caused a near-record fall in consumer sentiment.
Finance Minister Rishi Sunak blamed the slowdown on Russia’s "barbaric" invasion of Ukraine and “other global challenges,” noting that Britain’s economy is still growing faster than those of the U.S., Germany and Italy.
“The U.K. economy recovered quickly from the worst of the pandemic and our growth in the first few months of the year was strong ... but I know these are still anxious times,” he said in a statement.
Growth is slowing as manufacturers and retailers struggle to overcome supply bottlenecks following the COVID-19 pandemic and the war in Ukraine fuels rising food and energy prices. Retail sales figures show British consumers are already reducing spending as economists forecast the U.K. will see the biggest drop in living standards in more than six decades this year.
Britain, unlike some of its European neighbors, has limited direct trade ties with Russia, but it is heavily impacted by the jump in energy prices in Europe that were already high even before the Feb. 24 invasion.
The BoE has raised interest rates four times since December and is likely to increase them further this year to tame inflation.
The world's fifth-biggest economy shrank by a historic 9.3% in 2020 and grew by 7.4% in 2021, the sharpest swing in the output of any G-7 economy during the COVID-19 pandemic.
Overall GDP, on a monthly basis, is now 1.2% above its pre-COVID-19 level of February 2020.
However, a large part of the recovery reflects greater spending on healthcare – up 11% since the start of the pandemic – while consumer services are still 7% below their pre-pandemic level.
In March alone, sales of cars and motor vehicles slumped by 15.1%, leading to a 0.2% fall in overall services output.
The fall in GDP would have been even greater had it not been for an unusually strong 1.7% rise in construction output, reflecting repair work after winter storms in February.
On Wednesday, Britain's National Institute of Economic and Social Research (NIESR), a think tank, forecast GDP would fall in the third and fourth quarters, meeting the technical definition of a recession.
Last month, the International Monetary Fund (IMF) predicted Britain would see the weakest growth and highest inflation of any major advanced economy next year.
