UK economy shrinks unexpectedly as Covid-19 testing winds down

THE UK economy shrank in April at the sharpest pace in more than a year, raising the risk that the economy will contract in the second quarter.

Gross domestic product (GDP) fell 0.3 per cent from March when output declined 0.1 per cent, the Office for National Statistics said on Monday (Jun 13). A gain of 0.1 per cent was predicted by economists. 

The main cause of the drop in services output was a 5.6 per cent plunge in human health and social work, “where there was a significant reduction in NHS Test and Trace activity” following the end of pandemic restrictions. Were it not for that decline, the economy would have grown 0.1 per cent in the month.

Households showed signs of resilience despite higher inflation. Consumer-facing industries expanded 2.6 per cent in the month, led by a strong rise in retail sales. 

The figures may indicate that consumers are reacting slowly to a 54 per cent increase in energy bills that hit in April and a government increase in payrolls taxes. Recent data point to households cutting back on non-essentials items. 

An extra bank holiday for the Queen’s Diamond Jubilee means Britain may dodge a technical recession — 2 consecutive quarter of falling output — but it could come close. It 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.

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The precarious state of the economy presents a headache for both Bank of England Governor Andrew Bailey and Prime Minister Boris Johnson.

With inflation set to peak in double digits in October when energy bills are due to surge again, Bailey and his colleagues have little option but to keep raising interest rates, even if means making the cost of living crisis worse in the short run. They are worried about the risk of a 1970s wage-price spiral unless inflation is brought under control.

Policy makers are expected to deliver an unprecedented fifth straight rate hike on Thursday. A quarter-point move, as forecast, would take the benchmark rate to 1.25 per cent, the highest since 2009, and money markets are now pricing in rates climbing above 3 per cent next year.

For Johnson, who came close to being ousted by his own Conservative Party in a confidence vote on Monday, rescuing the economy is vital if he’s survive much longer.

A new £15 billion (S$25.5 billion) support package to subsidise energy bills will only go so far to help households, which had been on course for the biggest fall in disposable incomes since the 1950s.

Figures this week are expected to confirm surveys showing that retail sales fell in May.

Even the housing market, which defied the economic slump during the pandemic, is showing signs of cooling.

However, the labour market remain tight and a potent source of inflation, data tomorrow is predicted to show. BLOOMBERG