UK economy shrinks unexpectedly

Gross domestic product (GDP) fell 0.3% from March when output declined 0.1%. That may persuade the Bank of England (BoE) to move cautiously in fighting inflation. It’s expected to deliver a quarter-point rate rise on Thursday.

LONDON: The United Kingdom economy shrank in April at the sharpest pace in more than a year as the government wound down Covid testing, highlighting risks that a broader contraction is under way.

Gross domestic product (GDP) fell 0.3% from March when output declined 0.1%, the Office for National Statistics (ONS) said. A gain of 0.1% was predicted by economists.

The figures underscore a dimming outlook for the UK economy, with manufacturing, services and construction all contracting together for the first time since January 2021.

That may persuade the Bank of England (BoE) to move cautiously in fighting inflation. It’s expected to deliver a quarter-point rate rise on Thursday.

“The fall in output is unlikely to be short-lived,” said Yael Selfin, chief economist at KPMG UK. “The overall outlook remains downbeat as the squeeze on consumer income is expected to weaken demand.”

Bloomberg Economics’ Ana Luis Andrade said she expects the momentum to remain subdued in the following months, with output to decline by a marked 0.4% in the second quarter as the real income squeeze starts to bite.“Still, with inflation remaining stubbornly high and a red-hot labour market showing no signs of easing, it won’t be enough to prevent the BoE from hiking rates.

“Given the risks to the economy, a 50 basis point move this week looks highly unlikely – we expect a 25 basis points hike, with rates climbing to 2% by November.”

The pound slid as much as 0.6% to US$1.22.38 (RM5.39), reaching the lowest level in about a month. Some investors reined in bets the BoE will announce a half-point rate increase this week.

The GDP report showed services dropped sharply due to a 5.6% decline in health spending. Test and trace activity fell almost 70% in April. Excluding test and trace and vaccines, the economy would have grown 0.1% in the month, the ONS said.

Households showed signs of resilience in April, the month when energy bills jumped 54% and payroll taxes went up. Consumer-facing industries expanded 2.6%, led by a strong rise in retail sales and personal services such as hairdressing.

However, more recent data show households cutting back on non-essentials items in response to the cost of living squeeze.

Manufacturing fell 1%, with businesses reporting the impact of price increases and supply shortages. Construction fell by 0.4%.

An extra bank holiday for the Queen’s Diamond Jubilee means Britain may dodge a technical recession – two consecutive quarters of falling output – but it could come close.

April marks the third month in which GDP hasn’t grown, a clear sign that the economy is weakening rapidly in the face of inflationary pressures.

Separate figures showed the UK trade deficit excluding previous metals narrowed marginally in April to £20.6bil (RM111bil) as exports rose 7.4%, significantly outpacing a 0.7% rise in imports.

Exports to the European Union rose for a third straight month to their highest level on record.

The precarious state of the economy presents a headache for both BoE governor Andrew Bailey and Prime Minister Boris Johnson.

The CBI, Britain’s biggest business lobby group, downgraded its growth forecast for next year to just 1%. It called on the government to boost business investment “to spare the country from dipping into recession.”

With inflation set to peak in double digits in October when energy bills are due to surge again, Bailey and his colleagues have little option but to keep raising interest rates, even if it means making the cost of living crisis worse in the short run. — Bloomberg

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