Thursday, June 1, 2023

UK economy expands 0.1% in first quarter

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The UK economy expanded in the first quarter, showing greater resilience than forecast a few months ago, but the performance in March was worse than expected.

UK GDP rose by 0.1 per cent between the final quarter of 2022 and the first three months of this year, according to data published by the Office for National Statistics on Friday.

The expansion was in line with analysts’ expectations and followed a 0.1 per cent growth in the previous quarter.

The Bank of England said on Thursday it expected the economy to stagnate in both the first and second quarters with growth accelerating in the rest of the year. In February, the BoE forecast a recession lasting throughout 2023 and into the first quarter of next year. But it no longer expects such a long contraction thanks to lower energy prices, stronger global growth and more robust consumer and corporate confidence.

Ruth Gregory, economist at Capital Economics, said there was “still no recession, but with the full drag from higher interest rates yet to be felt it is too soon to sound the all-clear”.

The ONS noted that across the quarter, growth was driven by IT and construction. This was partially offset by falls in health, which registered a 0.5 per cent fall, and education and public administration, both down 0.7 per cent as these sectors were affected by widespread strikes.

Government consumption and net trade were also a drag on growth as exports fell 8.1 per cent, a larger contraction than the 7.2 per cent for imports. Business investment rebounded by 0.7 per cent, with the deadline for generous tax incentives to invest approaching at the end of March, but remained 1.4 per cent below their pre-pandemic levels

ONS data showed that the quarterly GDP rate was boosted by growth in January, revised up to 0.5 per cent, while output fell by 0.3 per cent between February and March, as the services sector stuttered.

The reading disappointed economists polled by Reuters who forecast GDP to be flat in March.

Darren Morgan, director of economic statistics at the ONS said that the fall in March was driven by “widespread decreases across the services sector”.

He explained that despite the launch of new number plates, cars sales were low by historic standards — continuing the trend seen since the start of the pandemic — with warehousing, distribution and retail also having a poor month.

The figures suggested that low real income and high interest rates, as well as the unusually wet weather, were damping activity, according to some economists.

These falls were partially offset by a strong month for manufacturing as well as growth in gas production and distribution and in construction.

Line chart of Real indices, rebased Q4 2019= 100 showing The UK economy is underperforming other countries

In March, the UK economy was 0.1 per cent above its pre-pandemic level of February 2020 on the monthly reading.

However, on the internationally comparable quarterly figure, GDP was still 0.5 per cent below Q4 2019, before the first Covid-19 restrictions. This is a much poorer performance than for the US, whose economy rose by 5.3 per cent over that period and the eurozone, up by 2.5 per cent.

The UK is “still at the bottom of the G7 league table”, said Samuel Tombs, economist at Pantheon Macroeconomics. He explained that this chiefly reflected weakness in households’ real spending, but “at least the magnitude of the underperformance is not increasing relative to other countries in Europe”.



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