British economy 'not yet in dire straits' as prospects for growth dim

Manufacturing services and construction in Britain all contracted together for the first time since January 2021

More recent data show UK households cutting back on non-essential items in response to the cost-of-living squeeze.

The British economy shrank in April at the sharpest pace in more than a year as the British government wound down Covid-19 testing, highlighting risks that a broader contraction is underway.

Gross domestic product fell 0.3% from March, the Office for National Statistics said, when economists had predicted a slight gain. 

The figures underscore a dimming outlook for the British economy, with manufacturing, services and construction all contracting together for the first time since January 2021. 

That may persuade the Bank of England to move cautiously in fighting inflation. It’s expected to deliver a quarter-point rate rise later this week. 

Goodbody economist Shaun McDonnell said that recent survey evidence suggests “a further decline in growth is coming”. Britain is “not yet in dire straits, but momentum is certainly not in its favour”, he said. 

“The fall in output is unlikely to be short-lived,” said Yael Selfin, chief economist at KPMG.

“The overall outlook remains downbeat as the squeeze on consumer income is expected to weaken demand,” the economist said.  

The pound slid to reach its lowest level in about a month. Some investors reined in bets the Bank of England will announce a half-point rate increase this week.

The GDP report showed services dropped sharply due to a decline in health spending. Excluding test-and-trace and vaccines, the economy would have grown 0.1% in the month, the ONS said 

Households showed signs of resilience in April, the month when energy bills jumped 54% and income taxes went up. 

Consumer-facing industries expanded, led by a strong rise in retail sales and personal services such as hairdressing.

However, more recent data show households cutting back on non-essential items in response to the cost-of-living squeeze.

Manufacturing fell and construction fell. An extra bank holiday for the British queen’s Diamond Jubilee means Britain may dodge a technical recession — two consecutive quarters of falling output — but it could come close. 

April marks the third month in which GDP hasn’t grown, a clear sign that the economy is weakening rapidly in the face of inflationary pressures. 

Bloomberg. Additional reporting Irish Examiner