UK Economy Shrinks Unexpectedly as Covid-19
Testing Winds Down
By Andrew
Atkinson
13 June
2022, 08:19 CEST
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 fell 0.3% from March when output declined 0.1%, the Office for
National Statistics said Monday. A gain of 0.1% was predicted by economists.
The main
cause of the drop in services output was a 5.6% 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% in the month.
Households
showed signs of resilience despite higher inflation. Consumer-facing industries
expanded 2.6% in the month, led by a strong rise in retail sales.
The figures
may indicate that consumers are reacting slowly to a 54% 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 -- two 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.
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%, the highest since 2009, and money markets are now pricing in rates
climbing above 3% 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 support package to subsidize energy bills will only go so far to help
households, who 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 labor market remain tight
and a potent source of inflation, data tomorrow is predicted to show.
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