UK economic growth slowed in the first quarter and growth is expected to remain weak all this year, with a recession “a distinct possibility” as the Bank of England battles higher-for-longer inflation than other countries.
Fresh numbers from the Office for National Statistics today confirmed the decline in gross domestic product in the first three months of the year and with businesses on the same day calling for urgent government help amid supply chain issues, hiring problems and costs rising and expected to keep going, the UK is likely to have teetered over the edge of a slowdown into contraction in the second quarter.
On a quarterly basis UK GDP grew by an unrevised 0.8% in the first three months of the year, according to the Office for National Statistics, down from 1.3% in the fourth quarter.
On an annualised basis, the economy grew at 8.7% in the first quarter, up from 6.6% in the final three months of 2021.
Household incomes to continue falling
While the economy was confirmed as having expanded, real household disposable incomes fell by 0.2%, a bigger drop than previously estimated.
This means real incomes have now dipped in each of the last four quarters.
Looking ahead, following the continued surge in energy prices and wider inflation and the rise in the main rate of national insurance contributions, households’ real disposable income probably fell around 3% in the current quarter compared to the first, according to Pantheon Macroeconomics.
For 2022 as a whole he thinks real incomes will fall by about 2.0%.
Pantheon and Capital both predict a 0.7% drop in GDP for Q2, where the economy was additionally depressed by a sharp fall in government Covid-related expenditure and the extra public holiday for the Queen’s Jubilee.
“And while we are not forecasting another decline in Q3, GDP growth will probably remain weak all this year and a recession is a distinct possibility,” said Paul Dales, chief UK economist at Capital.
Martin Beck at the EY Item Club agreed that the squeeze on household spending power “has further to run” and with a further large rise in the energy price cap looking likely in October, “hopes of avoiding a consumer recession rest on households who accumulated 'excess' savings during the pandemic spending a good amount of those funds”.
He said the Item Club thinks there's “scope for this to happen, but it's unlikely to be enough to prevent consumer spending growth slowing further”.
With inflation high and still rising, Dales said a drop in GDP in Q2 “won’t prevent the Bank of England from raising interest rates further, in our view from 1.25% now to 3.00% next year”.
Yesterday, BoE governor Andrew Bailey warned that the domestic economy is suffering more from the energy crisis than other countries, predicting UK inflation will stay higher for longer.
“The key thing for us is to bring inflation back down to target and that is what we will do,” Bailey said, though raising rates will act as a further brake on the economy.
Businesses and investors
It’s not consumers feeling the squeeze, with the British Chambers of Commerce director general Shevaun Haviland saying businesses are “facing unprecedented challenges,” namely increasing costs of raw materials, supply chain and shipping issues, problems in recruiting people, and spiralling energy prices.
"It really is the perfect storm of increasing costs, firmly putting the brakes on recovery."
Only 43% of businesses polled by the CBI are expecting to increase profitability in the next 12 months, Haviland said, citing the body’s next quarterly economic survey that is due next week.
For investors, UBS chief investment officer Mark Haefele warned that “volatility is likely to remain elevated until we see convincing evidence that inflation is moderating, recession risks are receding, and geopolitical threats—especially from curbs on Russian energy exports—are declining.”