UK economy contracts in March as consumers face surging inflation

Consumers cut back on spending as cost of living begins to bite.

Britain’s economy contracted by 0.1% in March, according to data released by the Office for National Statistics (ONS) today.

“The March decline highlights the pressure the economy is now coming under from the cost of living squeeze and the danger of it falling into outright recession later this year,” said Rupert Thompson, Investment Strategist at Kingswood.

The services sector, which includes contributions from education, arts and entertainment, and food service among others, fell 0.2% last month and was the main contributor to this decline.

More particularly, retail and wholesale activity fell 2.3% in March, with new car sales struggling to grow due to global supply issues.

“Household expenditure was still positive in the first quarter, as consumers took advantage of new-found freedoms to go out and spend money in shops, restaurants and hotels. But that was really the calm before the storm, as higher energy prices and taxes kicked in from April,” said Laith Khalaf, head of investment analysis at AJ Bell.

While the economy is 1.2% above the pre-pandemic level in February 2020, momentum seems to be slowing, which will stoke fears of a recession. Higher energy prices, taxes and interest rates will also make this outcome more likely, said Khalaf.  

“Recession risk is therefore elevated, and while growth is still expected this year, 2023 looks like it will be more challenging economically,” he elaborated.

Add the rising cost of living to the mix, and the Bank of England has a tough task managing the economy through these times, said Hinesh Patel, Portfolio Manager at Quilter Investors.  

“Nimble monetary policy will be required, something that hasn’t necessarily been on show in the last six months,” he said.

In addition, he maintains that rising costs will only get worse for consumers, with those bolstering their savings fund during lockdown having something to turn to.

“They [savers] may have accumulated a wall of savings during the pandemic but now they could be beginning to hold that money back for impending price rises,” said Patel.

"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," said Rishi Sunak, Chancellor of the Exchequer.

In the first quarter of the year, Gross Domestic Product (GDP) grew 0.80%, which fell slightly off the 1% expected by George Lagarias, Chief Economist at Mazars Wealth Management.

“While we believe that the UK economy will probably grow this year, versus the previous one, we expect more economic weakness in the coming months,” he said.