Breaking: The UK economy shrank in April, for the second month running.
GDP declined by 0.3% in April, adding to the 0.1% drop in March — with services, production and construction all shrinking in April.
The Office for National Statistics reports that the reduction in NHS Test and Trace activity weighed on the economy, while supply chain problems hit factories.
The ONS says:
- Services fell by 0.3% in April 2022 and these were the main contributors to April’s fall in GDP, reflecting a large decrease (5.6%) in human health and social work, where there was a significant reduction in NHS Test and Trace activity.
- Production fell by 0.6% in April 2022, driven by a fall in manufacturing of 1.0% on the month, as businesses continue to report the impact of price increases and supply chain shortages.
- Construction also fell by 0.4% in April 2022, following strong growth in March 2022 when there was significant repair and maintenance activity following the storms experienced in the latter half of February 2022.
- This is the first time that all main sectors have contributed negatively to a monthly GDP estimate since January 2021.
Worries about global growth, and China’s latest Covid-19 lockdowns, have knocked oil too.
Brent crude is down 1.6%, or $2 per barrel, at around $120/barrel this morning.
The UK’s FTSE 250 index of mid-sized companies has fallen over 2% this morning.
The FTSE 250 is more domestically focused than the FTSE 100, although the top faller is miner Ferrexpo.
The iron ore producer has slumped almost 10% after reporting that a Russian missile strike in southwest Ukraine has disrupted its barging operations that serve European customers.
European stock markets have tumbled to a three-month low, hit by fears over rising inflation, slowing growth, and Covid-19 outbreaks in China.
In London, the FTSE 100 index has dropped 1.4% or 103 points to 7213, the lowest in over three weeks.
Housebuilders, and hospitality companies such as hotel group Whitbread (-4.4%), are among the fallers, as April fall in GDP hit confidence.
The pan-European Stoxx 600 index has hit its lowest level since early March (when the Ukraine war sent shares sliding) down 1.5% at 416.37 points.
This follows heavy losses in Asia-Pacific markets, where investors were catching up with Friday’s rout in Europe and America — after US inflation hit a 40-year high.
Investors are increasingly anxious that central banks will raise interest rates aggressively to cool inflation, crushing growth.
The US Federal Reserve is expected to raise borrowing costs by at least 50 basis points on Wednesday, as it tries to get a grip on soaring consumer prices.
Richard Hunter, Head of Markets at interactive investor, says hopes that we’d seen ‘peak inflation’ have been scuppered.
“The latest inflation print proved too hot to handle, prompting investors to scramble for cover in anticipation of a more aggressive set of central bank moves.
In the US, the inflation reading of 8.6% in May compared to the April number of 8.3%, scuppering hopes that inflation had peaked. As such, the Federal Reserve decision on Wednesday takes on added significance. While investors were relatively comfortable with a likely hike of 0.5%, the fresh inflationary pressure has had some questioning whether a rise of 0.75% could be on the table.
In turn, this would reignite concerns – which had never been far away – that a newly determined round of aggressive monetary tightening could crimp economic growth, to the extent that the spectre of recession emerges.
There’s also anxiety about China, after nearly 200 Covid infections were linked to a single bar in the capital Beijing. A government spokesman described the outbreak as “ferocious”, hitting optimism that China might fully reopen soon.
Authorities have began a three-day mass testing campaign of Chaoyang’s 5 million residents. About 10,000 close contacts of the bar’s patrons have been identified, and their residential buildings placed under lockdown.
With easing restrictions only having been announced over the last few days, inevitably the news prompted concerns that demand and indeed consumer confidence would suffer a fresh blow, thus adding to the cocktail of factors which could inhibit global growth.
April’s contraction increases the risk of the UK slipping into recession, says Paul Dales of Capital Economics:
The 0.3% m/m fall in real GDP in April wasn’t as weak as it looks, but it nonetheless increases the chances that the economy is slipping into recession.
While this is unlikely to prevent the Bank of England from raising interest rates again on Thursday, it does increase the chances of a 25 basis point (bps) hike rather than the 50bps hike from 1.00% to 1.50% we are forecasting.
Environment secretary George Eustice has described figures showing the UK economy shrank by 0.3% in April as “disappointing”.
The minister told BBC Breakfast the war in Ukraine and other global pressures were having a “huge impact” on the world economy (via PA Media).
“As the world comes out of the pandemic there’s obviously a lot of global pressures, particularly inflation and obviously the events in Ukraine and that huge spike in gas prices is going to have a huge impact on the world economy.
“We’re starting to see that come through and obviously these are disappointing figures.”
Samuel Tombs of Pantheon Macroeconomics is hopeful the UK will avoid a full-blown recession.
He expects the economy will contract between April and June, but predicts the government’s £15bn cost of living package will support the economy later this year.
“A recession – two quarters of negative growth – remains unlikely.
“Households’ real disposable incomes should rise in both the third and fourth quarters now that the Chancellor has announced an extra £15bn in grants during these quarters, equal to nearly 2% of their likely income.”
Consumers are slashing spending fast in the face of a ‘once in a generation’ cost of living squeeze, says George Lagarias, chief economist at accountancy firm Mazars:
The number should come as no surprise, as a dismal retail sales number had already set the tone for the month, falling at a pace comparable only to the first lockdown in 2020.
For an economy where consumption is so central, the signs going forward are disconcerting. Technically, we may not yet be in a recession, but for many consumers it certainly feels like one.
Faced with a once-in-a-generation cost-of-living crisis, consumers are curtailing unnecessary expenses fast, causing a demand shock to the market.
The pound has hit a four-week low against the US dollar this morning, dropping half a cent to $1.227.
Sam Cooper, vice president of market risk solutions at Silicon Valley Bank, says April’s disappointing GDP report put more pressure on sterling:
“Another installment of disappointing economic data will add to the mounting downward pressure on the pound.
GBPUSD opens the week on the backfoot as the bleak reality of low growth and ongoing political headwinds continue to take their toll on sterling.”
The ending of free Covid-19 tests means April’s UK GDP figures were always going to look “worse than reality”, says James Smith of ING.
But… that pandemic spending also gave GDP an ‘artificial’ boost in previous months, making the economy look stronger.
Free Covid-19 testing stopped the previous month and according to the ONS that meant there was a 70% fall in test and trace activity. Pandemic-related health spending shaved a full 0.5 percentage points off GDP growth in April.
And if we strip that out, the headline 0.3% decline in monthly GDP should actually have been marginally into growth territory.
In short, just as health-related spending gave the level of GDP an artificial boost last year, helping the economy appear to recover to pre-virus levels more quickly than it actually had, these categories are now making the picture look superficially worse.
Chancellor Rishi Sunak says the UK not alone in seeing a slowdown….
“Countries around the world are seeing slowing growth, and the UK is not immune from these challenges.
“I want to reassure people, we’re fully focused on growing the economy to address the cost of living in the longer term, while supporting families and businesses with the immediate pressures they’re facing.”
It’s true that the US economy, and France, both contracted in the first quarter of this year.
But… the OECD has forecast that Britain will be the slowest-growing G7 economy in 2023, hit by higher interest rates, higher taxes, reduced trade and more expensive energy.
Environment Secretary George Eustice has conceded there are “some real challenges ahead” after the UK economy shrank in April.
Eustice was asked on Sky News whether it was time for the Government to “stop maintaining that this is the fastest-growing economy in the G7” after GDP fell 0.3% in April.
He cited the recovery from the pandemic, and supply chain pressures as causes of the decline.
“We’ve known for some time this was going to be a challenge.
“We’ve got unemployment that’s at record lows, the lowest it’s been since 1974, but of course there are some real challenges ahead and these GDP figures are a reminder of those challenges.”
The NHS Test and Trace and COVID-19 vaccination programme detracted 0.5 percentage points from GDP growth in April 2022, the ONS explains:
This was driven by further falls in NHS Test and Trace numbers, which fell by 70%, reflecting the changes to the COVID-19 testing policy in England from April.
The vaccination programmes grew by 71% on the month on account of the spring booster campaign.