UK economy unexpectedly shrinks as prices surge

The UK economy shrank in April, missing forecasts and confirming the recovery has stalled since January as surging prices hit household spending and business activity.

Gross domestic product fell 0.3 per cent between March and April, data published by the Office for National Statistics showed on Monday, below the 0.1 per cent increase forecast by economists polled by Reuters.

April’s growth was hit by the winding down of the NHS test and trace programme, which contributed to a 5.6 per cent drop in health sector activity.

The data followed two months without growth in the worst combination of surging prices and lack of economic expansion since the 1970s.

Sterling dropped 0.7 per cent against the dollar in early London trading.

Chancellor Rishi Sunak said on Monday: “I want to reassure people, we’re fully focused on growing the economy to address the cost of living in the longer term.”

However, last week, the Paris-based OECD cut its UK growth forecast for 2023 to zero, the lowest in the G20 excluding Russia, reflecting the impact of high inflation and rising rates.

Official data last month showed that consumer prices rose at an annual rate of 9 per cent in April, the fastest in 40 years and the highest of any G7 country.

David Bharier, head of research at the British Chambers of Commerce, a business organisation, said: “Businesses from all sectors are facing unprecedented rises in raw material costs, soaring energy bills, and wage pressures.” He added that the increase to employer National Insurance contributions in April had only added to companies’ woes.

Many economists note that UK GDP growth is on course to undershoot the Bank of England’s growth expectations of 0.1 per cent in the second quarter. However, with inflation forecast to increase further in the autumn, markets expect the Monetary Policy Committee to increase interest rates for the fifth consecutive time by 25 basis points to 1.25 per cent when it meets on Thursday.

“We expect the MPC to tread cautiously,” said Thomas Pugh, economist at leading audit, tax and consultants RSM UK. He forecasts a series of 25bp rises taking interest rates to 2 per cent by the end of the year, rather than big jumps, “which could tip the economy over into recession”.

The service sector fell 0.3 per cent, the main contributor to April’s fall in GDP. This was despite wholesale and retail trade rebounding 2.7 per cent and expansion in the accommodation and food services sectors.

Output in the recreation sector contracted, but overall the data suggest “that households are prepared to borrow more and save a little less in order to defend their current level of real expenditure”, said Samuel Tombs, economist at Pantheon Macroeconomics.

Production fell 0.6 per cent, driven by a sharp contraction in manufacturing as businesses reported the impact of price increases and supply chain shortages.

Construction dropped 0.4 per cent, following solid growth in March when stormy weather generated more demand for repair and maintenance.

The government announced last month a new package to support households with rising prices. James Smith, economist at ING said that meant “a consumer-led recession may be avoided”, but added that ultimately a lot depended on wholesale energy prices this autumn.

The ONS also published data on trade that showed the UK importing £24.3bn more than it exported in the three months to April, the second-largest deficit since records began in 1997 after March.