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The Guardian - UK

UK economy shrank by 0.1% in March as cost of living crisis bites – as it happened

The skyline of the City of London.
The skyline of the City of London. Photograph: robertharding/Alamy

Afternoon summary

Time to wrap up - here are today’s main stories:

We’ll be back tomorrow... GW

NatWest chair says best way to help poorest is through benefits

The chairman of NatWest bank has also weighed in on the cost of living crisis.

Sir Howard Davis argued that changes to the benefits system would be the most effective way for the government to help the poorest families struggling to cope with the cost of living crisis, instead of cutting taxes that also give the wealthy a financial boost.

Davies, a former deputy governor of the Bank of England, said soaring energy bills and rampant inflation were disproportionately affecting the poorest fifth of households and they should be the focus of financial support measures.

“The squeeze on living standards as a result of higher energy prices and higher food prices is really extraordinary,” he said.

“If you look at what people would need to do on their discretionary spending in order to offset those increases it’s massive.

The bottom 20% of the population, they would have to reduce their discretionary spending by 20% to stay even financially.”

Here’s the full story:

UK benefits only rose by 3.1% in April, in line with last September’s inflation rate.

Resolution Foundation explained last week that the easiest way to help to those hardest hit by high inflation would be to uprate benefits by the current inflation rate (which hit 7% in March).

British Prime Minister Boris Johnson has pledged that his government will “do things” to help Britons with the cost-of-living crisis.

However, there’s no hint about new measures could be.

Johnson told reporters that the increase in national insurance thresholds in July will help many workers*, adding:

“We will do things to help people in the short term, of course, and I’m not going to anticipate anything more that we may do, but the crucial thing is to make sure that we have the strong employment situation, because that is the key,”

* - from July, the threshold on earnings where national insurance starts being paid will rise from £9,880 to £12,570. Once you factor in April’s increase in national insurance rates, those earning up to £34,000 per year would pay less NI.

Russia’s second-largest oil producer Lukoil has agreed to buy Shell’s Russian retail and lubricants businesses, as the oil giant pushes on with its exit from the country following the Ukraine invasion.

The sale of Shell Neft includes 411 retail stations, mainly located in the Central and Northwestern regions of Russia, and the Torzhok lubricants blending plant, Shell said in a statement. The value of the deal hasn’t been disclosed.

It’s the first big deal in the oil and gas sector since most western companies pledged to leave the country following the invasion of Ukraine, as the Financial Times points out. It still requires the approval of Russia’s anti-monopoly authorities.

Maxim Donde, a vice-president with Lukoil, said:

“The acquisition of Shell’s high-quality businesses in Russia fits well into Lukoil’s strategy to develop its priority sales channels, including retail, as well as the lubricants business.”

Wall Street selloff continues

In New York, stocks have opened in the red as the selloff gripping Wall Street continues.

The S&P 500 index has dropped by 1%, or 39 points, to 3,898 in early trading, a new one-year low.

Technology stocks are continuing to slide, with Apple down 3.1% and Microsoft losing 1.7%, while Tescla has lost another 4.1% to $703.

The Nasdaq 100 index of leading tech firms is down 1%, taking its losses since the start of the year to 27% - a painful drawdown for tech investors.

Worries about how far the Fed and other central banks will have to go to get inflation under control pushed equities back into negative territory again, says Raffi Boyadjian, analyst at XM.

But there are other worries too, he adds:

Aside from monetary tightening and the ongoing lockdowns in China, there are renewed concerns about Russian gas flows to Europe and the UK government is threatening to tear up key parts of the Northern Ireland protocol, all of which are amplifying the doom and gloom in the markets.

Back in the UK, calls for more support for struggling households and businesses continue to grow, after GDP fell in March.

Julie Palmer, partner at accountancy firm Begbies Traynor, said firms face a ‘hostile business environment’

“News that the UK economy contracted in March is no surprise and just highlights the intense pressure that businesses are already under – and it’s only going to get worse.

“Begbies Traynor’s most recent Red Flag Alert revealed a near 20pc jump in the number of companies rated as being in ‘critical distress’ in the first quarter, compared with the same period a year ago.

“The Bank of England is warning that inflation could hit 10pc by the end of the year but we’re hearing anecdotal evidence costs have already gone beyond that for many businesses.

“Soaring energy prices are one of the biggest concerns for many businesses and although the Government is hinting at action, the fear is that it will come too late to be of any help for many.

“I fear that in the current hostile business environment many vulnerable companies will be tipped over the edge unless additional support is provided.”

Economic thinktank NIESR warns that March’s downturn brings a recession closer:

With consumer confidence indicators continuing to weaken we expect growth to be largely flat in April and close to flatlining in the second quarter overall.

The first estimate of GDP expenditure components for the first quarter was for a decline in business investment of 0.5%. With uncertainty from the war in Ukraine likely to weigh on investment further, we may see yet further delays to recovery from the Covid shock, reducing the capital stock and supply capacity yet further.

Sam Freedman, senior fellow at the Institute of Government, has spotted a rise in people seeking information on recessions and help with energy bills....

US producers kept raising their prices last month, as inflationary pressures continued to ripple through America’s economy.

The producer price index, which tracks how much manufacturers and services firms charge for their products, rose 0.5% month-on-month in April.

That followed advances of 1.6% in March and 1.1% in February in the PPI, which tracks price rises that will feed through to consumers.

Producer prices were 11% higher than a year ago, only slightly down on the record 11.5% in March, as firms passed on higher wages and input costs on.

Goods prices rose 1.3% in April, while services prices were flat.

The report adds:

Among prices for final demand goods in April, the index for motor vehicles and equipment advanced 0.8%. Prices for diesel fuel, chicken eggs, jet fuel, electric power, and residential natural gas also increased. Conversely, the index for gasoline fell 3.2%.

Over in the US, the number of new jobless claims has risen slightly, but remains historically low.

There were 203,000 new “initial claims” for US unemployment support last week, up from 202,000, and higher than forecast.

Although it’s still a low total, the number of Americans seeking jobless aid has been rising since hitting a 50-year low of 166,000 at the start of April.

Updated

Our energy correspondent Alex Lawson is reporting on BP’s AGM:

BP CEO defends profits as windfall tax calls grow louder

The chief executive of BP has told shareholders that a windfall tax on energy profits would not affect its plans to invest £18bn in the UK over the next eight years.

Speaking at the company’s AGM, Bernard Looney defended BP’s profits – which more than doubled in the first quarter of this year – saying it expects to pay more than a billion pounds in tax this year.

Looney said:

First – with higher oil prices and profits – we rightly pay higher taxes. Here in the UK, we expect our tax bill to rise 4 to 5 times this year – to well over £1bn. This will be mostly from the North Sea, which is already taxed at 40% – which is 20% higher than standard corporation taxes.

Second – people have asked if we are increasing investment in the UK. The answer to that is simply - yes. We used to spend roughly 10-15% of our capital in Britain. We expect to increase that to 15-20% this decade – adding up to around £18bn. All of it is focused on improving energy security in Britain, and the majority of it is focused on accelerating the energy transition.

Third – people ask, what are we doing with the profits we make in the North Sea? The short answer is we’re reinvesting all of them. This decade – with our current plans – we expect to reinvest every £1 we make – and hopefully more. This, of course, is just the capital we are investing – we are likely to be spending just as much again running our day-to-day operations.

Looney then turned to windfall taxes, arguing that they would “challenge investment” in UK energy sector...

He confirms that they would not stop its £18bn plans laid out last week, but suggests that it could invest even more in a “stable fiscal environment” (ie, without the risk of windfall taxes?...)

Looney says:

So, what’s our view on windfall taxes? A stable and competitive fiscal environment is an important element in any investment decision. – and that is what we have in Britain today. By definition, windfall taxes are unpredictable – and so would challenge investment in home-grown energy. We know that from past experience for the whole of the North Sea sector and supply chain.

In summary, we are backing Britain.

We’re backing Britain because it has been our home for over 100 years.

We’re backing Britain in what are difficult times for the country. This is exactly why I said our £18bn plans are not somehow contingent on whether or not there is a windfall tax.

We’re also backing Britain because it is a great place to invest your money. We would love to invest even more – and one of the key foundations of any such decisions will be a stable fiscal environment.

The windfall tax issue is becoming a hot potato for both energy companies and the UK government, which has refused to implement an additional levy on North Sea profits to fund help for strugging families with enery bills.

Overnight, the Financial Times reported that chancellor Rishi Sunak is demanding North Sea oil and gas companies agree to a significant boost to their energy investments in the UK to avoid being hit by a windfall tax.

On Tuesday, the chairman of Tesco added his support, saying there was an “overwhelming case” for a windfall tax on profits for energy producers to help those most in need.

Updated

Swati Dhingra to join Bank of England's MPC

London School of Economics academic Dr Swati Dhingra has been appointed to the Bank of England’s committee setting interest rates.

Dhingra, an associate professor at the LSE, will join the Bank’s monetary policy committee in August, after Michael Saunders’ term ends.

Dhingra’s academic focus is on international economics and applied microeconomics. She will join the MPC as inflation heads to a 40-year high and the economy teeters on the brink of recession.

Dhingra says

The work of the committee is of great importance as the UK faces an exceptional cost of living crisis amid the global challenges of the pandemic and the war.

It will be an honour to learn from the Bank’s vast expertise and regional visits, “to listen and to explain”, and to bring evidence to bear on the crucial policy decisions of the committee.

Dhingra will take the number of women on the MPC to three (out of nine).

She received her undergraduate degree from the University of Delhi, her MA from the Delhi School of Economics, and her MS and PhD from the University of Wisconsin-Madison.

Dhingra will replace one of the more hawkish members of the committee. Saunders was one of three MPC members who pushed for a larger rate rise last week, and on Monday he argued that the Bank must raise rates quickly or the inflation crisis will get worse.

Updated

There is a word for what is about to hit the UK economy and it is stagflation, my colleague Phillip Inman writes:

It feels like the strength of the economy has drained away since February at an alarming pace. And the situation would have been much worse were it not for the 1.7% month-on-month rebound in construction output after the drag faded from Storm Eunice in February.

Kristin Forbes, the former Bank of England policymaker, told MPs on the Treasury select committee on Wednesday that the UK found itself in a bad place at the moment.

If a country has higher energy prices, a falling exchange rate, trade restrictions that push up goods prices, expectations among businesses and consumers of much higher inflation in a year’s time and a tight labour market, forcing wages higher, though not as high as inflation, the outlook was especially tough. Add into the mix a decade of modest inflation going into the pandemic, which most other countries have not had, pointing to a lack of underlying inflation in their economies, and you have an even worse situation.

“The UK is the only country to tick every box,” she said.

Full story: John Lewis boss calls for Covid-style cost of living aid package

The boss of John Lewis has urged the government to intervene with a financial package of support to protect families from the cost of living crisis on the same scale as it did to help the nation deal with the Covid pandemic.

Dame Sharon White, a former second permanent secretary at the Treasury, said the government needed to act urgently as families struggle to pay utility and food costs as energy bills and inflation soars.

“The time has absolutely come for action whether it is an emergency budget or whether it is another vehicle,” said White, speaking on ITV’s Peston show on Wednesday night.

The chair of John Lewis Partnership, which also owns the Waitrose supermarket chain, said that action needed to be taken before summer with consumers facing another increase in energy bills of as much as £1,000 annually from October.

She said:

The decisive action we saw, I thought the government did incredibly well at the pace and scale during Covid, I think we need to see the same decisive action taken at speed and at pace.

White added that the UK faces “at least as pressing a challenge with the cost of living crisis” as it did with the pandemic, making the cost to public finances an “imperative”.

Updated

BoE's Ramsden: We've not finished raising interest rates

Bank of England deputy governor Dave Ramsden has warned that further interest rate rises will be needed to get inflation under control.

In an interview with Bloomberg, published this morning, Ramsden was clear that last week’s rise in Bank rate, to a 13-year high of 1%, will not be the last in this cycle.

He said:

Certainly on the basis of my current assessment of prospects, we’re not there yet in terms of how far monetary policy has to tighten.

I‘m still very, very supportive of the forward guidance that there may well need to be further tightening in the coming months.

Ramsden also warned there is a risk that UK inflation remains high for longer than hoped, with CPI expected to hit 10% this autumn

He suggested wages growth could be strong, with firms telling him that they are struggling to hire and retain staff.

Given what we know about the UK labor market, I wouldn’t be surprised if it turned out to be a bit tighter.

I think there are upside risks on inflation the medium term.

More here: BOE’s Ramsden Says Inflation Risks Mean More Rate Hikes Needed

Updated

How Apple lost title of the world’s most valuable company to Saudi Aramco

The sight of Apple handing its crown as the world’s biggest company to Saudi Arabia’s oil giant last night is a vivid example of how the economic outlook has changed this year.

The tech selloff pulled Apple’s market value down to $2.37 trillion last night, data from Refinitiv shows.

Apple started 2022 by becoming the world’s first three-trillion-dollar company, but expectations of rising inflation and higher interest rates have pushed Apple’s shares lower.

Apple’s shares fell 5% on Wednesday, taking its losses in 2022 to almost 18%, as the Wall Street selloff continued.

In contrast, Saudi Aramco’s value has soared by over a quarter during 2022, after the Ukraine war drove up up energy prices. Its market capitalisation was over $2.42 trillion on Wednesday night, giving it the top spot.

There’s “something symbolic in tech being overtaken by oil”, says Neil Wilson of Markets.com.

Victoria Scholar, head of investment at interactive investor explains why tech stocks have struggled:

A combination of rising oil prices and tech sector turmoil have sent both stocks in opposite directions with Apple losing its top spot. Earlier in the year Apple became the first company ever to reach a valuation of $3 trillion but with concerns about inflation and Fed tightening and a sell-off in tech, the iPhone maker has been dragged down amid the turmoil, slumping 5% yesterday and shedding nearly 20% since the March high.

Although the Fed’s tightening path poses a risk to the more debt-dependent stocks in the tech sector, broader uncertainty has unfairly punished tech stalwarts like Apple and Microsoft which have strong fundamentals and cash positions. Once inflation passes its peak and the growth outlook improves perhaps later this year, arguably these stocks have the potential to outperform as the tech sector looks beyond its trough.”

Saudi Aramco’s share prices has dipped 2% today, while Apple are down 1.2% in pre-market trading, so the title could yet switch back and forth in the sessions ahead....

Updated

European markets are all in the red, with the pan-European Stoxx 600 dropping around 2%.

FTSE 100 hits eight-week low

In the City, the FTSE 100 index has hit its lowest since mid-March as markets continue to be hit by recession worries.

The index of blue-chip shares has tumbled 2% in early trading to around 7201 points, down 146 this session.

Mining stocks are among the fallers, with copper producer Antofagasta (-5.7%), Glencore (-4.4%), Anglo American (-3.7%) and Rio Tinto (-3.5%) suffering from concerns that aggressive US interest rate rises this year will hurt the global recovery.

Tech investor Scottish Mortgage Investment Trust (-5%) and online grocery tech business Ocado (-5.3%) are also down heavily again, after the US Nasdaq index fell 3% yesterday.

The tumble in technology stocks this year is quite dramatic now:

Financial services provider Hargreaves Lansdown are the top FTSE 100 faller, down 7%, after reporting a slowdown in customer growth and client inflows amid market turmoil and the Ukraine war.

It said “unprecedented macro-economic and geo-political events has impacted markets and investor confidence”.

Pound at two-year low against US dollar

The pound has hit a new two-year low against the US dollar, as recession worries rise.

Sterling sunk below the $1.22 mark for the first time since June 2020, and also touched a seven-month low against the euro at €1.16.

The pound vs the US dollar
The pound vs the US dollar over the last two years Photograph: Refinitiv

Uncertainty over the UK economic outlook hit the pound, while the US dollar continues to benefit from bets of aggressive rate hikes by the Federal Reserve.

Sam Cooper, vice president of Market Risk Solutions at Silicon Valley Bank, warns the pound could remain weak:

“The disappointing GDP reading will add to the pound’s mounting list of concerns. With economic growth slowing, consumer prices spiraling and the fallout from Brexit lingering in the background, it is difficult to envisage sterling reversing its recent bout of weakness any time soon.”

The pound has looked vulnerable since the Bank of England slashes its growth forecasts last week and predicted inflation will hit 10%.

This analysis by Larry Elliott explains how currency speculators are circling the pound, sensing weakness as growth.

As Nick Parsons, head of research at the impact investment firm ThomasLloyd, put it:

“The UK is set for the slowest growth in the G7. It is going to have the highest inflation in the G7. It has the greatest political uncertainty. That’s a pretty unpleasant combination.”

Worryingly, UK business investment fell by 0.5% in Quarter 1 2022, suggesting companies held back from spending on new projects.

That leaves business investment 9.1% below its pre-coronavirus pandemic levels, today’s GDP report shows.

Martin Beck, chief economic advisor to the EY ITEM Club, says it’s a disappointing start to the year:

With the consumers feeling the pinch and the Government tightening its purse strings, the onus is on companies to step up and invest more before the super deduction ends next year.

But with business investment having fallen again in Q1 2022, the year has got off to a disappointing start in that respect.”

Rory Macqueen, principal economist at the thinktank NIESR, is also concerned:

March’s deterioration in consumer confidence translated into a sharp fall in retail and wholesale, which was exacerbated by continuing supply-chain problems in the motor industry.

Offsetting this, the continuing normalisation of GP and hospital activities cancelled out falling Covid-related activity to mean that the health sector returned to month-on-month growth. Falling business investment in the first estimate for the first quarter is a concern: with the government’s tax ‘super-deduction’ expiring in under a year we still still see little sign of a recovery from the Covid shock.”

This chart shows how the recovery in the UK’s service sector faded, with activity down 0.2% in March.

ONS GDP
ONS GDP Photograph: ONS

The wholesale and retail trade sectors fared worse, as consumers cut back on spending and the car sector was hit by falling sales.

Human health and social work activities saw the fastest growth, due to a rise in GP appointments, and accident and emergency care (although activity at NHS Test and Trace and the COVID-19 vaccination programme fell).

UK service sector in March
UK service sector in March Photograph: ONS

Full story: UK GDP shrinks in March as consumers cut spending

Britain’s economy contracted in March as consumers cut back on spending in the face of the rising cost of living, the latest official figures show.

Activity fell by 0.1% after flatlining in February – an even weaker performance than economic experts had been predicting – with spending in shops suffering particularly badly.

Data from the Office for National Statistics showed the economy struggling even before households were hit by higher energy bills and tax increases in April and will increase pressure on Rishi Sunak to ease the inflationary squeeze.

Sunak said:

“The UK economy recovered quickly from the worst of the pandemic and our growth in the first few months of the year was strong, faster than the US, Germany and Italy, but I know these are still anxious times.

“Our recovery is being disrupted by Putin’s barbaric invasion of Ukraine and other global challenges but we are continuing to help people where we can.”

Rachel Reeves, Labour’s shadow chancellor said the figures for gross domestic product would increase the public’s worries and urged the chancellor to produce an emergency mini-budget – a call echoed by the British Chambers of Commerce.

Here’s the full story:

The UK government must choose between an emergency budget or the growing risk of a recession, says TUC General Secretary Frances O’Grady:

“The Bank of England has warned the government that families are being forced to cut back, and the fall in demand will hit growth. But the Chancellor isn’t doing anything about it.

“The choice now is clear. Either the Chancellor steps up with an emergency budget to get pay rising, help families with soaring bills, and keep the economy moving. Or we risk sliding into recession, with families and businesses paying the price.”

UK faces fight to avoid recession

The UK faces a serious fight to avoid recession this year, warns Ed Monk, associate director for Personal Investing at Fidelity International.

“Soaring energy, fuel and food prices continue to eat into household budgets. And while some are already having to choose between basic necessities, this is unlikely to be the end of the squeeze. With inflation reaching 7% [in March] households are navigating largely unfamiliar financial territory while also trying to prepare for the likelihood that bills will rise still further.

“Despite government promises this week to address the cost of living challenge, the threat of recession appears to be growing. By the end of the second quarter of 2025 the UK economy is expected to be barely bigger than it is today.

The Bank of England has so far been focussed on bringing inflation down in the medium term via rate rises. It must now also factor in an economy at risk of shrinking earlier than it has forecast as well.”

Caroline Simmons, UK Chief Investment Officer at UBS Global Wealth Management, warns the UK could shrink in the current quarter, as soaring energy prices hit consumers.

Today’s figures will only fuel concerns for the growth outlook for coming quarters.

In particular, there is growing potential for UK GDP to be negative in the second quarter, which is in part due to the consumer squeeze from energy price rises.

Economists and business groups are understandably concerned by the UK’s economy slowdown, and the contraction in March.

Rain Newton-Smith, chief economist at the CBI, warns that times are going to get tougher:

“Cost pressures and rising prices have tightened their grip, with both businesses and households feeling the pinch. The end result is a weaker economic outlook.

“It’s clear that the most vulnerable households and energy-intensive businesses may need further support, so the government should keep this under review.

“But the only way to build a resilient economy, one that can withstand price shocks, is a relentless focus on growing productivity and potential output. Business is the solution to both, so should be adequately supported to invest and grow.”

Rachel Reeves MP, Labour’s Shadow Chancellor of the Exchequer, says the government must draw up an emergency budget now, to help address the cost of living crisis.

March’s drop in GDP adds to the worries families already face, as inflation rises faster than wages, explains Reeves.

She urges Boris Johnson’s cabinet, who are holding an awayday in Staffordshire today, to agree to take emergency action on the cost of living crisis, after failing to do so in the Queen’s speech.

Reeves says:

“The Government’s Queen’s Speech this week was out of ideas and out of touch, devoid of any real economic plan for growth or to tackle the cost of living crisis.

“Anything less than coming back urgently with an Emergency Budget to help ease the pressure from the cost of living crisis is a failure by this Conservative government.”

The drop in GDP in March will add to the pressure on the government to do more to help struggling families, as calls for an emergency budget increase.

Chancellor of the Exchequer, Rishi Sunak, says he knows these are ‘anxious times’ -- but does not pledge any new help.

Responding to the GDP figures, Sunak says:

“The UK economy recovered quickly from the worst of the pandemic and our growth in the first few months of the year was strong, faster than the US, Germany and Italy, but I know these are still anxious times.

“Our recovery is being disrupted by Putin’s barbaric invasion of Ukraine and other global challenges but we are continuing to help people where we can.

“Growth is the best way to help families in the longer-term so as well as easing immediate pressures on households and businesses, we are investing in capital, people and ideas to boost living standards in the future.”

But calls for more help are growing by the day.

Last night, the chair of John Lewis said decisive action was needed now, to protect families from the cost of living crisis.

Dame Sharon White told ITV’s Peston show:

“The time absolutely has come for action whether it’s an emergency budget or whether it’s another vehicle.”

The UK economy fared better than most other G7 countries in the first quarter of this year.

But, its recovery from the pandemic crisis is still in the middle of the pack.

The UK’s 0.8% growth in January-March is ahead of France (which stagnated), Germany (which grew 0.2%), Italy (where GDP fell 0.2%) and the US (which surprisingly shrank 0.4%).

But the US, Canada and France have all outperformed the UK if you compare growth to pre-pandemic levels, as this chart shows:

Rising cost of living is ‘really beginning to bite’

The 0.1% fall in GDP in March shows that the rising cost of living is ‘really beginning to bite’, says ONS director of economic statistics Darren Morgan.

Speaking on the Today programme now, Morgan explains:

We saw retailing have a large fall and that was well below expectations. In particular, we saw far lower levels of spending on big-ticket, non-essential items.

We also saw a large fall in fuel sales, with one factor people telling us they’re beginning to cut back on essential and non-essential journeys because of the price they’re paying at the pumps.

Morgan adds that the UK’s motor trade indutry is really struggling at the moment. New car registrations in March were the weakest since 1998, partly due to supply chain issues.

ONS: Lowest quarterly growth in a year

Darren Morgan, director of economic statistics at the Office for National Statistics (ONS), says:

“The UK economy grew for the fourth consecutive quarter and is now clearly above pre-pandemic levels, although growth in the latest three months was the lowest for a year.

“This was driven by growth in a number of service sectors as the economy continued to recover from Covid-19 effects, including hospitality, transport, employment agencies and travel agencies. There was also strong growth in IT.”

“Our latest monthly estimates show GDP (gross domestic product) fell a little in March, with drops in both services and in production.

“Construction, though, saw a strong month, thanks partly to repair work after the February storms.”

Quarterly growth slowed to 0.8%

Overall, the UK economic growth slowed to 0.8% during the first three months of 2022, as the economy cooled.

That’s slower than the 1.3% growth recorded in October-December, but it does lift quarterly GDP above its pre-crisis levels.

It’s also a little weaker than the 1% growth expected by economists.

That could be the best quarterly growth we see this year, as the cost of living crisis hits the economy.

Updated

After March’s reversal, the UK economy is now just 1.2% above its pre-coronavirus pandemic level.

Services is now 1.5% above its pre-coronavirus level, while construction is 3.7% above and production is still 1.6% below -- with factories having struggled with supply chain disruption, and shortages of raw materials and parts.

The UK’s service sector shrank by 0.2% in March, and was the main contributor to March’s 0.1% drop in GDP.

Output in consumer-facing services fell by 1.8%, following a 0.5% growth in February 2022.

Production also shrank by 0.2%, but construction expanded by 1.7% (suggesting building activity recovered after storm disruption in February).

UK economy shrank 0.1% in March

Newsflash: The UK economy contracted in March, with GDP falling by 0.1%.

That’s slightly worse than the 0% growth forecast, and will fuel concerns that economy is weakening.

The GDP report also shows there was no growth in February.

February’s GDP has been revised down to 0% growth, down from the +0.1% first estimated.

More to follow...

Deutsche Bank UK economist Sanjay Raja also predicts the UK economy flatlined in March, and could contract in the current quarter (April-June).

Here’s his take the UK GDP report (to be released in around 10 minutes):

We expect Q1-2022 GDP to expand by just under 1% q-o-q. Much of the jump in activity will likely have come from household consumption and private investment (including net acquisitions, dwelling investment, and stocks).

Looking ahead to Q2, we will be watching the March GDP number closely, given the carry over effect into the next quarter. On this front, we expect monthly GDP to have flatlined, with risks tilted to a negative print. We continue to expect a Q2 contraction, with the economy shrinking by 0.2% q-o-q – a call we’ve had for some time now.

For 2022, we continue to see growth printing at 3.8%, though risks to our projection are tilted to the downside, with recession risks likely to remain elevated into Q2-2022.

Updated

Introduction: UK GDP report for March and Q1

Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.

A new healthcheck on the UK today will show how the economy has slowed, as the cost of living crisis hits families and threatens to pull the country into recession.

The GDP report for the first quarter of 2022, due at 7am, is expected to show that the economy expanded by a healthy-sounding 1% in Q1, down from 1.3% in the final quarter of 2021.

But most of that growth came in January, as activity picked up strongly after Omicron disruption in December.

Growth slowed to just 0.1% in February, and some economists fear it could have ground to a halt in March, with estimates of 0% growth in March alone.

Michael Hewson of CMC Markets explains:

Index of services is expected to make up most of the expansion, coming in at 0.9%, however if the Bank of England is to be believed this quarter could be as good as it gets this year for the UK economy. Business investment is also expected to improve to 1.9% from 1% in Q4.

On the monthly GDP numbers, we’ve seen a 0.8% expansion in January, and a 0.1% expansion in February. March could well see a contraction, although estimates are for stagnation at 0%, which is still likely to drag the quarterly number down.

Also coming up today

European markets are set to fall around 1%, wiping out Wednesday’s rally, as fears over inflation and rising interest rates keep hitting stocks.

Wall Street had another turbulent session yesterday, finishing lower, with technology stocks continuing to slide.

Higher than expected US inflation dampened hopes that the US Federal Reserve could achieve a ‘soft landing’ as it raises interest rates, with CPI only dipping to 8.3% in April.

Hebe Chen of IG explains:

Inflation in the United States rose at a slower rate in April, but impatient traders were not happy with the pace.

The US CPI print that came out last night was still stronger than the forecast of 8.3% vs 8/2% (y/y), suggesting the price pressure will persist at higher levels for longer even if it’s already peaked.

That selloff has seen Apple lose its title as the world’s most valuable company to energy giant Saudi Aramco, which has been boosted by higher oil prices.

On the corporate front, BT, Rolls-Royce, Balfour Beatty and SuperDry are reporting results.

The agenda

  • 7am BST: UK GDP and trade reports for Q1 2022, and March
  • 9am BST: IEA monthly oil market report
  • 9.30am BST: ONS’s latest economic activity survey
  • 1.30pm BST: US PPI survey of producer price inflation
  • 1.30pm BST: US weekly jobless claims report

Updated