Economy unexpectedly shrinks in March as recession risks loom

Britain‘s economy unexpectedly shrank 0.1 percent in March after a slump in car sales due to supply-chain problems, marking a weak end to the first quarter of a year when the risk of recession is looming.

Data from the Office for National Statistics showed the economy was struggling even before households were hit by higher energy bills and tax increases in April. The data is expected to increase pressure on Chancellor Rishi Sunak to ease the inflationary squeeze.

“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,” The Guardian quoted Sunak as saying.

“Our recovery is being disrupted by Putin’s barbaric invasion of Ukraine and other global challenges but we are continuing to help people where we can.”

Gross domestic product grew by 0.8 percent in the first three months of 2022, the Office for National Statistics said – below the 0.9 percent forecast by the Bank of England and the 1.0 percent expected on average by economists polled by Reuters.

Despite falling short of expectations, the growth between January and March is likely to mark a high point for the year, with consumer spending facing its biggest squeeze in decades.

Last week, the BoE forecast inflation will go above 10 percent in the final quarter of the year, up from 7 percent in March, which was already more than three times its 2 percent target.

“The economy had less momentum than we thought even before the full hit from the cost of living crisis has been felt. The risk of recession has just risen,” Paul Dales, chief UK economist at Capital Economics, said.

Meanwhile, Bank of England deputy governor Dave Ramsden has warned that further interest rate rises will be needed to get inflation under control. 

Ramsden also warned there is a risk that UK inflation remains high for longer than hoped, with CPI expected to hit 10 percent this autumn.