The UK economy contracted by 0.1% in March and the situation is expected to worsen as the country’s livelihood crisis worsens.
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LONDON – The UK is in a recession after the economy contracted 0.1% in March, with economists expecting further contraction this year.
Although the economy as a whole grew 0.8% for the first quarter, slightly below the unanimous forecast for 1% growth, January was the only positive month for the quarter. Ukraine’s war and subsequent supply chain problems and rising energy prices have added to the inflation toll, which has been rising for decades.
Sterling has reached a two-year low against the US dollar following data as traders digested growing uncertainty about the UK’s economic outlook.
The shocking monthly contraction in March – which economists had hoped would come flat – presented a concern for the government of Prime Minister Boris Johnson as the country’s cost of living has yet to reach a peak.
“Ultimately, things are only going to get worse for consumers. The energy bill is expected to rise again when the price cap is rescheduled later this year, when inflation is proving to be more stable than expected,” said Hinesh Patel, Portfolio Manager, Quilter Investors.
Inflation in the UK peaked at a 30-year high of 7% in March, and in April, the country’s energy regulator raised its price target by 54% to adjust for rising prices. In a speech to the state’s inaugural session of parliament on Wednesday, the government pledged to focus on economic growth to address rising living costs.
Patel added that the Bank of England now faces “an almost impossible task of managing the economy from this waterlogging”.
“They are in a mode of increasing the offensive rate for the time being, but it may not last long as economic problems have already started to play out,” he added.
The Bank of England has raised interest rates in four consecutive policy meetings as it looks to keep inflation in check and markets are set to price five more hikes by the spring of 2023.
However, James Smith, ING’s developed market economist, suggested that the central bank’s more cautious tone in recent weeks indicates that it will not meet these expectations, and may decide to raise a few more points before the break so as not to create further downward pressure. Is. On economic growth.
Thursday’s GDP figures also show that the UK’s dominant consumer-oriented services industry suffered a significant blow in March, falling 1.8% as consumer spending fell amid pressure on households.
Health costs will be reduced
Smith of ING said a second consecutive drop in output should be expected in April, coinciding with the completion of the free Covid-19 test.
“Surprisingly, despite the ongoing wind-down of covid-related activities, health output did actually increase in March, but obviously, it is unlikely to be sustainable,” Smith noted.
“Health spending has been a major driver of GDP through the epidemic, and indeed, the overall size of the economy will be about 1% smaller if output in this sector remains flat since the beginning of 2020.”
Caroline Simmons, UK chief investment officer at UBS Global Wealth Management, was also wary.
“The UK’s GDP is likely to be negative in the second quarter, due to consumer pressure due to rising energy prices,” he said.
UK stock heat
As concerns grow about the outlook for growth in the coming quarters, investors are also considering its impact on the market.
However, Simmons noted that the UK economy is not representative of the UK equity market. The December target of 8,100 points in the opposite direction of the UBS FTSE 100 index; The FTSE was trading around 7172 mid-morning Thursday.
According to Daniel Casali, chief investment strategist at Tilney Smith & Williamson, for the UK, both labor demand and business investment intentions remain strong, reducing the risk of a sharp recession in overall growth.
The Bank of England expects growth to be flat in the second quarter, although Casley further noted that there is a possibility of a moderate contraction.
“For investors, large cap UK-listed companies derive the lion’s share of their sales overseas, which is really important for global growth,” Casley added.
The IMF recently lowered its global growth forecast for 2022 and 2023 by 3.6%, up from 6.1% last year.
“Along with the sharp EPS gains made by the energy sector, the UK company’s profit outlook has improved.
“At the very least, rising company earnings (and cheap valuations) should limit UK equity downsides in the current volatile market situation.”