Recession on the horizon as UK growth slumps
Hopes the UK can avoid a recession this year have taken a battering after the economy shrank by 0.1 per cent in March, piling renewed pressure on the Chancellor to offer more help to struggling families.
GDP grew by just 0.8 per cent in the first quarter, its slowest pace for a year and less than the 1 per cent expected.
The services sector was the biggest drag on growth as consumers tightened their belts. Construction and healthcare output, which grew by 1.7 and 2.1 per cent respectively, stopped the fall from being even sharper.
The FTSE 100 sank 2.5 per cent on the news. Even cryptocurrencies – often touted as recession-proof – plunged as investors sold off risky assets in anticipation of a global downturn. With $200bn wiped off crypto markets today, it looks like the bubble has finally burst.
While the growth figures are alarming, the UK isn’t alone. The EU’s Q1 growth average was 0.4 per cent, with Germany, France and Italy on 0.2, 0 and -0.2 per cent respectively.
The word on economists’ lips is “stagflation” – low growth plus inflation. It’s becoming a reality, and history suggests escaping it will be painful.
Even this scenario might be too rosy. “Suddenly, our forecasts that GDP will be flat in both the second quarter and the third quarter seem pretty optimistic,” says Paul Dales, chief UK economist at the consultancy Capital Economics. “A contraction in GDP or a recession now feels a bit more likely.”
The Bank of England predicts a fall in GDP of nearly 1 per cent in the final quarter of the year.
Behind the anticipated slump lies the self-fulfilling prophecy that bedevils most downturns. Confidence is part of a fragile cycle – once it evaporates, people are going to stop spending.
Regardless of whether the UK chalks up consecutive quarters of negative growth, economic hardship is already kicking in. Boris Johnson and his Cabinet have retreated to Stoke for an away-day to brainstorm low-cost solutions to the crisis.
The worrying GDP figures might force Rishi Sunak to make a major intervention soon.
As the IEA’s Julian Jessop writes on Reaction, below: “Consumer confidence is so fragile that it may be too risky to delay the announcement of additional help until the autumn [budget].”
Sunak has so far resisted ramping up support. The PM is believed to be among those urging him to do more.
The Chancellor is acutely aware that the public finances are in a sorry state and wants to draw a line under Covid largesse. But with inflation predicted to hit 10 per cent later this year and living standards already plummeting, he might be left with little choice.