The economy unexpectedly shrank in March, raising the spectre of a full-blown recession later this year caused by the soaring cost of living.
Britain’s GDP dipped by 0.1 per cent in the month, according to the Office for National Statistics, as anxious families reined in their spending and consumer confidence plummeted.
It came as Boris Johnson and Rishi Sunak appeared to be relaxing their opposition to a windfall tax on the energy giants to help poorer households cope with their bills. The surprise March GDP reverse means output grew by just 0.8 per cent over the first three months of the year despite the lifting of almost all remaining Covid restrictions in February.
Russia’s invasion of Ukraine and the spike in energy and food bills that followed has quickly snuffed out the post-pandemic bounce.
The fall in GDP spooked the City, which had been expecting a small rise, and the FTSE-100 Index of leading company shares fell 161.2 points or 2.2 per cent to 7,186.5 in early trading.
The pound also slumped, sliding to its lowest level in two years against the dollar at one stage and a seven-month low against the euro.
Chancellor Mr Sunak said: “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.
“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.”
But City economists said the underlying GDP trend was “worryingly weak” and warned of the growing risk of a recession — two consecutive quarters of negative growth — over the spring and summer.
Paul Dales, chief UK economist at forecasters Capital Economics, said: “It now seems likely that GDP will contract in the second quarter. And with the full hit of the cost-of-living crisis yet to be felt, the chances of a recession have just risen. Even so, with price pressures still strengthening, the Bank of England may have no choice but to add to the woes of households by raising interest rates further.” A breakdown of the figures shows that retail and car sales were the worst hit sector, with a 2.8 per cent fall in output.
Overall the dominant services sector which accounts for 80 per cent of GDP, fell by 0.2 per cent in the month. Production, which includes manufacturing, also dropped 0.2 per cent while construction grew by 1.7 per cent.
Consumers are facing the biggest cut in real incomes since the Fifties this year as inflation rapidly outpaces wage growth. Next week inflation figures from the ONS are expected to show the Consumer Prices Index passed eight per cent in April for the first time in more then 30 years. The boss of John Lewis today became the latest captain of industry to call for urgent action on the scale of response before energy bills rise even further in the autumn.
Speaking on ITV’s Peston show, Dame Sharon White said: “I think there ought to be action before the summer…I thought the Government did incredibly well at pace and scale during Covid, I think we need to see the same decisive action taken at speed and at pace.”
The Prime Minister noticeably repeatedly stopped short of ruling out a windfall tax on energy giants during a radio interview this morning.
It came after Bernard Looney, the chief executive of BP, said that its investment plans would not be hit by a windfall tax. Mr Johnson was chairing Cabinet in Stoke-on-Trent as the Government seeks to cut the burden of bureaucracy such as the cost of passports and driving licences. He is coming under growing pressure to impose the windfall tax to pay for measures to ease the situation for millions struggling with their finances.
