UK economy shrank by 0.3% in April as recession fears rise – business live | Business

UK economy shrank by 0.3% in April

Breaking: The UK economy shrank in April, for the second month running.

GDP declined by 0.3% in April, adding to the 0.1% drop in March — with services, production and construction all shrinking in April.

The Office for National Statistics reports that the reduction in NHS Test and Trace activity weighed on the economy, while supply chain problems hit factories.

The ONS says:

  • Services fell by 0.3% in April 2022 and these were the main contributors to April’s fall in GDP, reflecting a large decrease (5.6%) in human health and social work, where there was a significant reduction in NHS Test and Trace activity.
  • Production fell by 0.6% in April 2022, driven by a fall in manufacturing of 1.0% on the month, as businesses continue to report the impact of price increases and supply chain shortages.
  • Construction also fell by 0.4% in April 2022, following strong growth in March 2022 when there was significant repair and maintenance activity following the storms experienced in the latter half of February 2022.
  • This is the first time that all main sectors have contributed negatively to a monthly GDP estimate since January 2021.

UK Monthly GDP M/M (Apr) act: -0.3%, exp: 0.1%, prev: -0.1%

UK Monthly GDP 3M/3M (Apr) act: 0.2%, exp: 0.4%, prev: 0.8%

— Michael Hewson 🇬🇧 (@mhewson_CMC) June 13, 2022

Mazars: This feels like a recession for consumers

Consumers are slashing spending fast in the face of a ‘once in a generation’ cost of living squeeze, says George Lagarias, chief economist at accountancy firm Mazars:

UK GDP was negative, -0.3% for the second straight month in April.

The number should come as no surprise, as a dismal retail sales number had already set the tone for the month, falling at a pace comparable only to the first lockdown in 2020.

For an economy where consumption is so central, the signs going forward are disconcerting. Technically, we may not yet be in a recession, but for many consumers it certainly feels like one.

Faced with a once-in-a-generation cost-of-living crisis, consumers are curtailing unnecessary expenses fast, causing a demand shock to the market.

The pound has hit a four-week low against the US dollar this morning, dropping half a cent to $1.227.

Sam Cooper, vice president of market risk solutions at Silicon Valley Bank, says April’s disappointing GDP report put more pressure on sterling:

“Another installment of disappointing economic data will add to the mounting downward pressure on the pound.

GBPUSD opens the week on the backfoot as the bleak reality of low growth and ongoing political headwinds continue to take their toll on sterling.”

The ending of free Covid-19 tests means April’s UK GDP figures were always going to look “worse than reality”, says James Smith of ING.

But… that pandemic spending also gave GDP an ‘artificial’ boost in previous months, making the economy look stronger.

Smith explains:

Free Covid-19 testing stopped the previous month and according to the ONS that meant there was a 70% fall in test and trace activity. Pandemic-related health spending shaved a full 0.5 percentage points off GDP growth in April.

And if we strip that out, the headline 0.3% decline in monthly GDP should actually have been marginally into growth territory.

In short, just as health-related spending gave the level of GDP an artificial boost last year, helping the economy appear to recover to pre-virus levels more quickly than it actually had, these categories are now making the picture look superficially worse.

UK GDP
UK GDP Photograph: ING/ONS

Chancellor Rishi Sunak says the UK not alone in seeing a slowdown….

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

“I want to reassure people, we’re fully focused on growing the economy to address the cost of living in the longer term, while supporting families and businesses with the immediate pressures they’re facing.”

It’s true that the US economy, and France, both contracted in the first quarter of this year.

But… the OECD has forecast that Britain will be the slowest-growing G7 economy in 2023, hit by higher interest rates, higher taxes, reduced trade and more expensive energy.

Environment Secretary George Eustice has conceded there are “some real challenges ahead” after the UK economy shrank in April.

Eustice was asked on Sky News whether it was time for the Government to “stop maintaining that this is the fastest-growing economy in the G7” after GDP fell 0.3% in April.

He cited the recovery from the pandemic, and supply chain pressures as causes of the decline.

“We’ve known for some time this was going to be a challenge.

“We’ve got unemployment that’s at record lows, the lowest it’s been since 1974, but of course there are some real challenges ahead and these GDP figures are a reminder of those challenges.”

The NHS Test and Trace and COVID-19 vaccination programme detracted 0.5 percentage points from GDP growth in April 2022, the ONS explains:

This was driven by further falls in NHS Test and Trace numbers, which fell by 70%, reflecting the changes to the COVID-19 testing policy in England from April.

The vaccination programmes grew by 71% on the month on account of the spring booster campaign.

BUT – GDP would’ve grown 0.1% were it not for the winding down of Test & Trace

— Andy Bruce (@BruceReuters) June 13, 2022

April’s UK GDP report is weaker than forecast, points out Andy Bruce of Reuters…

Economist Jumana Saleheen agrees it’s a negative surprise:

UK monthly GDP data out this morning shows the economy contracted in *April*
GDP -0.3% m/m
IP -0.6% m/m

Analysts expected a small contraction (given the weakness in leading indicators such as the PMIs). But they got a negative surprise today. pic.twitter.com/wfGyylPaZL

— Jumana Saleheen (@JumanaSaleheen) June 13, 2022

This chart shows how UK services, production and construction all contracted in April – the first time that’s happened in the same month since the Covid-19 lockdown of January 2021.

UK economy by sector
Photograph: ONS

Labour: Drop in GDP is ‘really worrying’

Labour’s shadow chancellor, Rachel Reeves, tweets that the 0.3% fall in GDP in April is ‘really worrying’:

NEW: GDP figures show UK economy shrank by 0.3% in April.

Really worrying.

Instead of addressing structural weaknesses, all the Tories have are sticking plasters.

Labour will create a stronger, more secure economy – by boosting our energy, supply chain and business security.

— Rachel Reeves (@RachelReevesMP) June 13, 2022

The TUC agrees:

GDP figures seriously worrying.
April show 0.3% decline on the month, following 0.1% decline in March.
ONS warn:
“This is the first time that all main sectors [manufacturing, construction and services] have contributed negatively to a monthly GDP estimate since January 2021”. pic.twitter.com/2hY1rnuxiV

— TUC Economics and Social Affairs (@TUCeconomics) June 13, 2022

KPMG: Fall in output unlikely to be short-lived

April’s fall in GDP shows the UK economy could shrink in the current quarter – putting it on the brink of recession.

Yael Selfin, chief economist at KPMG UK, says:

“The overall outlook remains downbeat as the squeeze on consumer income is expected to weaken demand, and external headwinds intensify due to the deteriorating outlook among the UK’s main trading partners.

“The rest of Q2 could see an additional fall in GDP owing to the weakening momentum and the impact of the extended bank holiday.

“UK GDP fell by 0.3% in April, in part as a result of a fall in Covid related health spending but also due to further supply chain disruptions and weakening demand.”

April’s contraction means the UK economy is now only 0.9% larger than before the first Covid-19 lockdown in spring 2020, as this chart shows:

UK GDP
UK GDP Photograph: ONS

Darren Morgan, director of economic statistics at the ONS, explains that the winding down on test and trace, and surging business costs, led the economy to shrink in April:

“A big drop in the health sector due to the winding down of the test and trace scheme pushed the UK economy into negative territory in April.

“Manufacturing also suffered with some companies telling us they were being affected by rising fuel and energy prices.

“These were partially offset by growth in car sales, which recovered from a significantly weaker than usual March.”

UK economy shrank by 0.3% in April

Breaking: The UK economy shrank in April, for the second month running.

GDP declined by 0.3% in April, adding to the 0.1% drop in March — with services, production and construction all shrinking in April.

The Office for National Statistics reports that the reduction in NHS Test and Trace activity weighed on the economy, while supply chain problems hit factories.

The ONS says:

  • Services fell by 0.3% in April 2022 and these were the main contributors to April’s fall in GDP, reflecting a large decrease (5.6%) in human health and social work, where there was a significant reduction in NHS Test and Trace activity.
  • Production fell by 0.6% in April 2022, driven by a fall in manufacturing of 1.0% on the month, as businesses continue to report the impact of price increases and supply chain shortages.
  • Construction also fell by 0.4% in April 2022, following strong growth in March 2022 when there was significant repair and maintenance activity following the storms experienced in the latter half of February 2022.
  • This is the first time that all main sectors have contributed negatively to a monthly GDP estimate since January 2021.

UK Monthly GDP M/M (Apr) act: -0.3%, exp: 0.1%, prev: -0.1%

UK Monthly GDP 3M/3M (Apr) act: 0.2%, exp: 0.4%, prev: 0.8%

— Michael Hewson 🇬🇧 (@mhewson_CMC) June 13, 2022

The cost-of-living crisis has dragged business optimism to its lowest point in more than a year, accountancy firm BDO reports this morning.

BDO’s optimism index has fallen by 4.82 points to 101.93, the second consecutive month of decline, as bosses worry about continued inflationary pressure and supply chain disruption in the months ahead.

BDO partner Kaley Crossthwaite said:

“The fact that business optimism is now at the same level it was more than a year ago while the country was still experiencing coronavirus restrictions paints a worrying picture for the UK economy.

“Weakened consumer spending power is undoubtedly weighing heavily on businesses and will continue to curtail growth in the months ahead.”

CBI warns UK government over Northern Ireland protocol

Richard Partington

Richard Partington

The CBI has warned the government that its threat to override the Northern Ireland protocol is forcing companies to think again about investing in Britain and dragging down the economy.

Tony Danker, the director general of the CBI, said reaching a deal was in the best interests of the British economy as businesses and households struggle with the soaring cost of living and looming risk of recession.

“I don’t think it’s time for grandstanding; I think it’s time to do a deal. I’m firmly of the view the Europeans are being inflexible. At the same time, our measures – which may come on Monday – to take unilateral action in response are unhelpful.”

The head of the lobby group, which represents 190,000 companies across the UK, said renewed Brexit uncertainty triggered by the protocol dispute was hurting the British economy, and leading some companies not to invest in the UK.

Legislation giving ministers power to override parts of the Northern Ireland Protocol is due to be published in the House of Commons on Monday afternoon.

Introduction: UK GDP report due, as CBI warns of recession risks

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

We’re about to get a new healthcheck on the UK economy this morning as April’s GDP report is released.

The data, due at 7am BST, comes amid concerns that Britain could be heading towards recession, as the cost of living crisis hits households and businesses.

Analysts fear the report will show a weak economy.

Alvin Tan of RBC Capital Markets sets the scene:

The UK April GDP release today will capture the direct output impact of the ending of the UK’s Covid test-and-trace programme. We think that this will subtract around 0.6ppts from m/m GDP growth in April.

Even allowing for some growth in private sector activity, we still see monthly GDP growth of -0.4%. We currently see GDP growth flat for Q2 as a whole, but a larger-than-expected contraction in April would be difficult to claw back in subsequent months given the June holidays.

And here’s Michael Hewson of CMC Markets:

The latest GDP numbers for April are expected to show a weak economy, battered by the big jump in energy prices, with the index of services forecast to grow by 0.1%, after declining -0.2% in March.

The headline monthly number, which showed a fall of -0.1% in March, will be lucky if we show any growth at all in April, while on a three-monthly basis we can expect to see a decline from 0.8% to 0.4%.

The CBI, which represents British businesses, is today calling for the government to get a grip on the economy, warning that UK households will fall into a recession this year.

It has downgraded its GDP growth forecasts to 3.7% in 2022 (from 5.1% previously) and 1.0% in 2023 (from 3.0% previously).

It also fears household spending will shrink next year amid dented business and consumer confidence.

Director general Tony Danker said the Prime Minister and Chancellor had to take urgeng action to support growth, including supporting business investment and tackling labour shortages in industries such as aviation.

Let me be clear – we’re expecting the economy to be pretty much stagnant. It won’t take much to tip us into a recession. And even if we don’t, it will feel like one for too many people.

“Times are tough for businesses dealing with rising costs, and for people on lower incomes concerned about paying bills and putting food on the table.

Wider recession fears are also roiling markets, after the US inflation rate hit a new 40-year high of 8.6% on Friday.

That sent stocks reeling in Europe and on Wall Street at the end of last week, and Asia-Pacific markets have followed – with Japan’s Nikkei sliding almost 3%.

European stock markets are set for further losses today:

The agenda

  • 7am BST: UK GDP report for April
  • 7am BST: UK balance of trade for April
  • 11am BST: NIESR’s monthly GDP tracker for May
  • 1pm BST: India’s inflation rate for May

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