Unexpected economic reversal indicates UK is ‘perilously close to a recession’

An unexpected reversal in the UK economy indicates the country is “perilously close to a recession,” according to City economists.

Gross domestic product (GDP) in the UK fell 0.3 per cent in April, marking the second month in a row the economy has shrunk, according to figures published today by the Office for National Statistics (ONS). Analysts had expected the economy to expand 0.1 per cent.

April’s weaker than expected GDP figures were triggered by the government spending less on healthcare as the NHS Test and Trace operation and free Covid-19 testing were wound down. All the UK’s major sectors contracted for the first time since January 2021, when the country was in the teeth of the most onerous pandemic curbs.

The news sent London-listed shares tumbling, with the FTSE 100 shedding 1.89 per cent and the mid-cap FTSE 250 collapsing nearly 2.5 per cent. The pound extended its losing streak against the dollar, weakening 0.85 per cent to buy $1.2209.

Figures for the coming months are likely to show the economy flagging even more as the worst effects of the cost of living crunch start to emerge in the data. The extra bank holiday in June will also dampen activity in the second quarter.

Major economic institutions including the Bank of England and the Organisation for Economic Co-operation and Development (OECD) have warned Britain’s economy is headed for a sharp slowdown as a result of historic price rises squeezing businesses and households. The OECD last week said only Russia will register weaker growth than the UK in the G20 next year.

Consumers are expected to cut spending in response to historically high inflation eroding their living standards at the fastest pace since the 1950s. Consumer spending accounts for around two thirds of economic output in the UK.

Brits were hit by a 54 per cent uplift to their energy bills in April. The 1.25 percentage point national insurance hike – which landed in the same month – likely took its toll on household finances in May due to most workers being paid toward the end of the month.

Yael Selfin, ​​chief economist at KPMG UK, said: “The overall outlook remains downbeat as the squeeze on consumer income is expected to weaken demand.”

Soaring costs caused by Russia’s invasion of Ukraine raising energy prices, ongoing supply chain disruption and worker shortages have crimped business activity, dragging down April output, the ONS said.

The economy needs to grow around 0.5 per cent in both May and June to prevent it from contracting across the whole of the second quarter, according to calculations by Paul Dales, chief UK economist at Capital Economics.

Today’s downbeat figures indicate that growth pattern is unlikely to materialise, suggesting “the UK is perilously close to a recession,” Dales added.

Others agreed with that assessment.

“The impact of rising energy prices, particularly on manufacturing, is likely to impede recovery in the coming months. We now forecast month-on-month growth to stagnate in May and June, leading to a decline of 0.4 per cent in the second quarter overall,” the National Institute of Economic and Social Research said.

However, chancellor Rishi Sunak’s £15bn cost of living support package launched last month will offset some of the hit to households’ living standards this year, reducing the chances of a technical recession – defined as two consecutive quarters of economic contraction.

Over the three months to April, the economy expanded 0.2 per cent, indicating growth has flatlined since the initial boost from the end of Covid-19 measures at the beginning of the year.

“Countries around the world are seeing slowing growth, and the UK is not immune from these challenges,” Sunak said.

The Bank of England is anticipated to push ahead with a fifth rate hike in a row on Thursday, adding to the headwinds swirling over the UK economy, with markets now pricing in over a 50 per cent chance of a 50 basis point rise.

Inflation has surged to a 40-year high of nine per cent, but is expected to top 10 per cent in the final months of the year, five times the Bank’s two per cent target.

Yields on UK government debt shot up on bets that governor Andrew Bailey and other rate setters will move to tame inflation again. 10-year gilts added 0.03 points to hit 2.474 per cent, the highest level since 2014.

That surge in prices has prompted Threadneedle Street to raise rates from a record low of 0.1 per cent to one per cent, the highest level in 13 years.

Trade deficit keeps widening

The UK trade deficit widened by a shade over £7bn over the three months to April to £24.3bn, the second largest shortfall since record began in 1997.

Britain sold more services abroad than it purchased, with the services trade surplus jumping just over £3bn over the same period to £37.2bn.