UK economy shrinks by 0.3% as cost of living crisis continues to hit households

The UK economy contracted for the second month in a row, falling by 0.3% in April, official figures show.

The Office for National Statistics (ONS) said April’s data  showed gross domestic product (GDP), a measure of the size of the economy, fell by 0.3% in the main services sector, primarily due to the government’s Covid Test and Trace scheme ending and lower vaccination activity.

GDP would have risen by 0.1% last month with the Test and Trace and vaccines impact stripped out, the ONS said.

April’s drop in GDP was also the biggest contraction since 2021 and follows a slight decline of 0.1% in the previous month.

The ONS added that there were declines in the manufacturing and construction sectors, down 1% and 0.4% respectively in April, with manufacturers in particular noting the impact of soaring prices and supply chain issues.

Darren Morgan, director of economic statistics at the ONS, said: “A big drop in the health sector due to the winding down of the test and trace scheme pushed the UK economy into negative territory in April.

“Manufacturing also suffered with some companies telling us they were being affected by rising fuel and energy prices.

“These were partially offset by growth in car sales, which recovered from a significantly weaker than usual March.”

Responding to the latest GDP figures released by the ONS, Chancellor Rishi Sunak said: “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.

“We have a plan to turbocharge productivity through investment in capital, people and ideas, so everyone across the country can benefit from a strong, healthy economy.”

Environment Secretary George Eustice said the decline in the UK economy in April presents “some real challenges ahead” and blamed both recovery from the pandemic and supply chain pressure as the reason for the fall.

Speaking on Sky News, he said: “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.”

Could the UK enter a recession?

The latest ONS figures come as millions of households are struggling amid the cost of living crisis.

Energy bills and petrol prices are among the everyday costs that have soared in price, after UK inflation hit 9% and is expected to climb even higher later this year.

The Confederation of British Industry (CBI) has warned that the UK is on the brink of recession and downgraded its growth outlook to 3.7% for this year, from 5.1% previously, and just 1% in 2023, down from 3%.

It called for measures including steps to alleviate labour and skills shortages.

CBI chief economist, Rain Newton-Smith, said: "This is a tough set of statistics to stomach.

“War in Ukraine, a global pandemic, continued strains on supply chains - all preceded by Brexit - has proven to be a toxic recipe for UK growth."

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, is forecasting the economy to contract overall between April and June as the cost of living crisis hits hard, but still believes the UK will dodge a full-blown recession.

He said: “GDP now is 0.4% below its January 2022 peak, as the further recovery in private-sector activity has been more than offset by a sharp fall in Covid-related government expenditure and renewed weakness in the manufacturing sector.

“Nonetheless, 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 £15 billion in grants during these quarters, equal to nearly 2% of their likely income in these quarters.

“So provided energy prices rise no further and households start to draw cautiously on their savings, we look for quarter-on-quarter GDP growth of about 0.6% in the third quarter and 0.5% in the fourth quarter.”