UK economy grows sluggishly in Q1 as inflation curbs consumers spending

The UK economy grew sluggishly during the first three months of the year as double-digit inflation curbed consumer spending and labour unrest curtailed output in industries ranging from transportation to healthcare and education.

Gross domestic product, the broadest measure of economic activity, increased 0.1 per cent in the first quarter compared with the previous three months, the Office for National Statistics said Friday.

The figure matched the growth rate during the fourth quarter of last year and was in line with economic forecasts.

The figures come a day after the Bank of England approved a 12th consecutive interest rate increase as it struggles to curb inflation that has remained at around 10 per cent since July. The bank also upgraded its economic outlook, saying the underlying picture is more positive than it was earlier this year.

Let's be clear, whilst the Bank of England may believe the UK economy will now avoid the predicted recession entirely, the country is not in good health, said Danni Hewson, head of financial analysis at AJ Bell, a UK-based investment platform.

Rising prices, rising interest rates and strike action have created a cocktail that's pretty unpalatable.

On a monthly basis, the picture was even more grim. Output fell 0.3 per cent from the previous month in March.

The British economy has been hard hit by Russia's invasion of Ukraine, with stubbornly high inflation triggering a wave of strikes by workers who have seen their wages eroded by rising prices. The UK inflation rate was 10.1 per cent in March, compared with 5 per cent in the US and 6.9 per cent in the countries sharing the euro.

Those strikes contributed to quarterly declines in output from the transportation, public administration, healthcare and education sectors, the ONS said.

Overall output from the service sector, which accounts for about 80 per cent of the UK economy, rose 0.1 per cent.

One optimistic note came from manufacturing and other productive industries, where output grew 0.1 per cent following no growth in the previous quarter and five consecutive quarters of decline before that.

Construction output increased 0.7 per cent, rising for a sixth straight quarter.

While inflation is expected to fall rapidly in the coming months as last year's big increases in energy and food prices drop out of the annual calculation, some economists are beginning to raise concerns about the steep rise in interest rates.

Higher rates increase borrowing costs for business and consumers, which tends to curb spending and control inflation. But that also slows economic growth.

Central bankers have struggled to balance those competing pressures amid efforts to slow price increases without slamming the brakes on economies that are still recovering from the effects of the coronavirus pandemic.

There's still no recession, but with the full drag from higher interest rates yet to be felt, it is too soon to sound the all-clear, said Ruth Gregory, deputy chief UK economist at Capital Economics, after the figures were released.