UK economy shrinks as inflation ‘starts to bite’

In Britain, the cost of living crisis is already weighing heavily on the economy. Gross domestic product fell 0.1% in March after being flat in February, the Office for National Statistics said on Thursday, as spending fell.

The services sector, usually a key driver of economic growth, fell 0.2% in March from the previous month, led by a sharp drop in wholesale and retail trade, particularly for cars. While supply chain disruptions have hampered manufacturing, separate data released last month showed more broadly that retail sales fell 1.4% in March as people spent less on groceries and in essence.

There are signs that households are cutting back on spending as prices rise at their fastest pace in three decades, fuel prices have hit record highs and economists forecast inflation could peak above 10% This year.

The cost of living is “really starting to bite,” Darren Morgan, the agency’s director of economic statistics, told the BBC.

Overall, in the first three months of the year, the economy grew 0.8%, the statistics office said. Growth was fueled by the better-than-expected recovery in January when restrictions were lifted after the Omicron wave of the coronavirus. Compared to other major economies, it was a good start to the year: the United States shrank by 0.4%, the French economy stagnated and that of Germany grew by only 0.2%. .

But the outlook for the UK economy is weak and the risk of recession has intensified. The Bank of England said last week that it expects growth to slow in the second quarter as inflation-adjusted incomes continue to fall and supply chains are disrupted by the war in Ukraine and the lingering pandemic.

Although, in an effort to curb inflation, the central bank has hiked interest rates four times since December, taking them to their highest level since 2009, policymakers are divided on the number of further rate hikes that the economy can bear. The bank predicted the economy would contract by almost 1% in the last quarter of the year. And for next year, on an annual basis, he also predicts that the economy will contract.

Much of the pain will come from a squeeze in disposable income, which is expected to be the second biggest drop since records began in 1964, the central bank said. On Wednesday, the National Institute for Economic and Social Research, a research body in London, added to the stark warnings. He said he estimated 1.5 million households across Britain would face food and energy bills above their disposable income this financial year.

These prospects increase pressure on the UK government to take more decisive and targeted action to support those on low incomes.

If slowing inflation is the main priority for the economy, it would be much easier if the Treasury provided an “appropriate cushion for the poorest households”, who have already suffered the most from the pandemic, Jagjit Chadha, director of the research group, writes in the report released Wednesday.

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