UK economy shrinks in March but still grows in Q1
Newsflash: The UK economy shrank in March, but still achieved growth in the first quarter of this year.
New data from the Office for National Statistics shows that UK GDP fell by 0.3% in March, worse than economists expected.
That follows stagnation in February.
The contraction in March was driven by a 0.5% fall in services sector activity.
Production output grew by 0.7% and construction by 0.2%.
Output in consumer facing services fell by 0.8% in March 2023, after unrevised growth of 0.4% in February.
Looking at the broader picture, though, GDP grew by 0.1% in the three months to March 2023, confirming that the UK avoided falling into recession last winter.
Key events
Full story: UK economy shrank unexpectedly by 0.3% in March
Phillip Inman
The UK economy shrank unexpectedly in March, by 0.3%, as the cost of living crisis and industrial action took a toll, my colleague Phillip Inman writes.
However, the economy grew by 0.1% over the first quarter as a whole, mainly because of a strong January, while growth flatlined in February, according to the Office for National Statistics. It followed 0.1% growth in the final quarter of 2022.
Darren Morgan, an ONS director of economic statistics, said:
“Despite the UK economy contracting in March, GDP grew a little over the first quarter as a whole.
“The fall in March was driven by widespread decreases across the services sector. 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.
“These falls were partially offset by a strong month for manufacturing as well as growth in gas production and distribution and also in construction.”
The Bank of England, which increased interest rates to 4.5% on Thursday, has forecast that the UK economy will stagnate this year – expecting growth of 0.25% – after tearing up a forecast last year that Britain was on course to suffer one of the longest recessions on record, stretching into 2024.
More here:
Economists are hopeful that the UK economy will avoid a technical recession this year, after growing slightly in the first quarter of 2023.
Thomas Pugh, economist at audit, tax and consulting firm RSM UK, predicts the UK economy will shrink in April-June, but won’t suffer two quarters of contraction in a row.
Pugh says:
‘The 0.1% q/q rise in GDP in Q1 means the UK has probably avoided a recession altogether this year. Admittedly, the economy will probably contract in Q2 due to the impact of bad weather, strikes and an extra Bank holiday. But we expect GDP to rebound in the second half of the year meaning there won’t be the two consecutive quarters of negative GDP growth needed to satisfy the usual definition of a recession. Of course, that is a technicality.
The big picture is that the economy is still 0.5% below its pre-pandemic level and is unlikely to regain that level until the end of the year at the earliest.
Ben Jones, CBI lead economist, says the economy is showing more resilience than expected, but warns that 2023 will still be difficult:
“The UK economy is proving more resilient than widely expected and it looks increasingly likely that the UK will avoid a recession this year. Underlying momentum appears to be firming, with our surveys showing growth expectations for the quarter ahead creeping back into positive territory for the first time in a year.
“Nonetheless, this is still going to be a difficult year for many UK households and businesses. Whilst we anticipate that inflation will slow rapidly through the summer, higher interest rates will act as a drag on spending. But we are likely to have weathered the worst of the storm, and expect a mild economic recovery in the year ahead.”
UK government minister Huw Merriman said the first-quarter growth statistics for 2023 were “good news” and had defied “more pessimistic” forecasts.
After the ONS reported GDP rose by 0.1% in January-March, the rail minister told Times Radio that “It is good news that we’re seeing signs of growth”.
Merriman added:
“Previously, the Bank of England had given a more pessimistic prediction, so that’s very positive.
“We need to stay on track, make sure we halve inflation, get the economy growing, but we’ve got to reduce debt as well.
“These are steps in the right direction. I’m keen that we maintain the momentum and make sure that the economy is in a stable place so we can continue to deliver the other priorities that people have for us.”
Comparing quarterly numbers to pre pandemic level, pattern across G7…UK still 0.5% smaller economy than back then, ie pretty much no growth since start of the Parliament… forecast to get there by end of year – 4 years without growth, Germany not quite as bad, others much better pic.twitter.com/JOggizUS8x
— Faisal Islam (@faisalislam) May 12, 2023
International comparisons
The UK economy lagged behind some major international rivals in the first quarter of this year, but did outperform Germany.
The 0.1% rise in UK GDP in January-March, reported this morning, matches the eurozone average of 0.1% in Q1 2023, but weaker than the European Union average of 0.3% growth.
France, though, grew by 0.2% in January-March, while Italy and Spain both expanded by 0.5%, and Portugal’s growth accelerated to 1.6%.
Germany’s economy stagnated in Q1 2023, though.
Further afield, the US economy grew at an ‘annualised rate’ of 1.1% in Q1, which is the equivalent of almost 0.3% quarterly growth.
Japan is forecast to have grown by an annualised 0.7% – or almost 0.2% during the quarter – in the first three months of 2023.
Canada is forecast to have grown by 2.5% on an annualized basis – or around 0.6% in the quarter.
ING: UK economy sees “surprise contraction in March”
The 0.3% contraction in the UK economy in March is a surprise, says James Smith, ING’s developed markets economist.
Smith warns that the economic data is “hard to read right now”, a problem that will be compounded by the extra Bank Holiday in May for the coronation.
But in general, falling gas prices and a resilient jobs market suggests the near-term recession risk has eased, Smith says. And it you strip out all the volatility, the economy “seems to be reasonably stagnant”.
Smith explains:
Monthly GDP shows an unexpected 0.3% fall in activity during March, owing to weakness across a range of sectors. March was memorably wet, so some of this underperformance can be attributed to bad weather, and to some extent also strike action. But that doesn’t seem to explain all of the disappointment, with a 0.8% fall in consumer-facing services, and casts doubt over the Bank of England’s tentative finding in yesterday’s Monetary Policy Report that private sector activity had staged a modest recovery throughout the first quarter.
Ultimately, the recent figures have been thrown around by several one-off factors, ranging from the Queen’s funeral last year, to strikes and even some knock-on effect from the World Cup at the end of last year.
That volatility will continue, given that the extra Bank Holiday this month for the Coronation will likely temporarily shave 0.5% off monthly GDP, only to be regained in June. While the impact of these additional holidays appears to have lessened compared to past decades, it’s probably enough to produce a 0.2% decline in overall second-quarter GDP.
While the UK has so far managed to avoid a technical recession, defined as two consecutive quarters of growth, March’s figures highlight show that the economic backdrop is sluggish.
So says Victoria Scholar, head of investment at interactive investor, who adds:
Stubbornly high inflation, negative real wage growth and general cost of living pressures are weighing on the consumer, and in turn the services industry which is typically a key growth engine for the UK economy. Today’s figures point to the importance of taming inflation, a daunting task facing the Bank of England and the government, in order to catalyse a revival in services.
The pound has come off its near one-year highs but is trading modestly higher against the US dollar after the Bank of England raise interest rates again to 4.5% on Thursday.”
Hunt: Good news that economy is growing
Chancellor Jeremy Hunt has responded to today’s GDP report, saying:
“It’s good news that the economy is growing but to reach the government’s growth priority we need to stay focused on competitive taxes, labour supply and productivity.
“The Bank of England Governor confirmed yesterday that the Budget has made an important start but we will keep going until the job is done and we have the high wage, high growth economy we need.”
Yesterday, the BoE said that the fiscal support in Hunt’s Spring Budget had helped to strengthen the economic outlook.
Hunt doesn’t mention, though, that the economy stalled in February, and contracted unexpectedly in March after a strong January.
It’s also not immediately clear how a ‘high wage, high growth’ economy will be achieved while the government is refusing to accept public sector pay demands, leading to strikes which are hitting growth.
Exceptionally wet March hit UK economy
The UK economy was also hit by awful weather in March.
March was “exceptionally wet”, the ONS says – indeed, the sixth wettest March since 1836.
This hit retail sales in March, as wet weather kept people off the high street, and may also have hit output for other industries.
January’s GDP report has been revised higher, to show the economy grew by 0.5% during that month, up from 0.4%.
But February remained in stagnation, with no growth, followed by the 0.3% drop in activity in March.
On a quarterly basis, the economy was still 0.5% smaller than its pre-coronavirus (COVID-19) level set in the final quarter of 2019.
UK avoids winter recession
Today’s GDP report confirms that the UK economy has avoided falling into recession last winter, having posted modest growth over the last six months.
The 0.1% growth estimated in January-March this morning follows 0.1% growth in the final quarter of 2022.
The economy did contract, by 0.1%, in July-September.
But to be a technical recession, the economy would need to have shrunk by two quarters in a row.
And, the good news today is that it didn’t, despite the heavy pressures on households and businesses from rising prices and borrowing costs.
ONS: Anecdotal evidence that industrial action in March hit economy
Industrial action also hit growth in the last quarter, with public servants striking as they sought pay rises to match the UK’s highest inflation in decades.
The ONS says:
There was anecdotal evidence, reported on monthly business survey returns, to suggest that industrial action in March 2023 had a notable impact on different industries of varying degrees.
These included the health sector (junior doctors), the civil service, the education sector (teachers and university lecturers) and the rail network. This is further supported by the Business Insights and Conditions Survey (BICS), which stated 1 in 10 businesses (9%) were directly or indirectly affected by industrial action in March 2023.
ONS director of economic statistics Darren Morgan says weak car sales pulled the economy back in March.
“Despite the UK economy contracting in March, GDP grew a little over the first quarter as a whole.
“The fall in March was driven by widespread decreases across the services sector. 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.
“These falls were partially offset by a strong month for manufacturing as well as growth in gas production and distribution and also in construction.
“Across the quarter as a whole growth was driven by IT and construction, partially offset by falls in health, education and public administration, with these sectors affected by strikes.”
UK economy shrinks in March but still grows in Q1
Newsflash: The UK economy shrank in March, but still achieved growth in the first quarter of this year.
New data from the Office for National Statistics shows that UK GDP fell by 0.3% in March, worse than economists expected.
That follows stagnation in February.
The contraction in March was driven by a 0.5% fall in services sector activity.
Production output grew by 0.7% and construction by 0.2%.
Output in consumer facing services fell by 0.8% in March 2023, after unrevised growth of 0.4% in February.
Looking at the broader picture, though, GDP grew by 0.1% in the three months to March 2023, confirming that the UK avoided falling into recession last winter.
The UK economy is expected to “grow modestly in Q1”, predicts Michael Hewson of CMC Markets.
That would follow a “surprise upgrade” to growth data for Q4 2022 which showed the UK economy eke out growth of 0.1%, and “confounding the expectation of a technical recession”, he adds:
The first 3 months of this year have seen the economy perform much better than even the most optimistic of forecasts, leaving lots of egg on the faces of those who were predicting all manner of disasters during the twilight weeks of last year.
The OBR, IMF, OECD, and Bank of England have all been proved to be unduly pessimistic in their assessments of the UK economy in recent months, particularly when it comes to growth.
The unexpected weakness in commodity prices, namely oil and gas, as well as the milder weather has certainly helped, while consumer spending has proven to be much more resilient.
Analysts at RBC Capital Markets predict the UK economy managed to grow, just, in the first quarter of this year.
They told clients this morning:
Strikes and industrial action have weighed on Q1 GDP, particularly in February and March.
Nonetheless, Q1 GDP growth is likely to be positive overall. Indicators of private sector activity and sentiment continue to improve, and while we expect the loss of output from the public sector to weigh on activity overall, we still expect positive March GDP growth of 0.1% m/m, which would leave quarterly GDP growth at 0.1% q/q.
Introduction: UK GDP report coming up…..
Good morning. We’re about to learn how the UK economy performed in the first quarter of this year.
The first estimate of UK GDP in March, and for Q1 2023, is due at 7am BST, and will show if the country achieved economic growth in the face of the cost of living crisis, rising interest rates and strikes.
Economists are hoping we will see modest, positive growth in the first quarter of the year, with GDP forecast to have risen by 0.1% in the January-March period.
GDP in March itself could be flat, though.
That would follow a strong January, when the economy grew by 0.4%, and a weak February when there was no growth at all [tho this data could be revised at 7am too].
A few months ago, economists had feared the UK could be in recession by now. But the fall in energy prices has helped the economy to outperform those gloomy expectations.
Yesterday, the Bank of England admitted that economic activity has been less weak than it expected in February. It now forecasts that UK GDP will be flat over the first half of this year, although underlying output (excluding the estimated impact of strikes and an extra bank holiday) could rise by around 0.2% in both Q1 and Q2.
On its upward growth revision, BoE governor Andrew Bailey said:
“It’s a very big upward revision, but the level of growth is still very, it’s still weak, let’s be honest.”
February’s growth was held back by civil service and teachers’ strikes, which hit the services sector.
And industrial action is continuing today, with members of the drivers’ union Aslef striking for 24 hours across virtually all the big passenger operators in England.
Further strikes will be held on May 31 and June 3 – the day of the FA Cup final at Wembley.
Members of the Rail, Maritime and Transport union (RMT) will strike on Saturday – the day of the Eurovision Song Contest final in Liverpool.
The agenda
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7am BST: UK GDP report for March and Q1 2023
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7am BST: UK trade report for March
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9.30am BST: Hong Kong GDP report
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3pm BST: University of Michigan index of US consumer sentiment
