Inflationary Pressure Persists as UK Economy Records Modest 0.1% Growth in Q1

The U.K. economy experienced a slight growth of 0.1% in the first quarter, following an unexpected contraction in March, according to official figures released on Friday.

Economists surveyed by Reuters had predicted the same growth figure for the first three months of the year, but anticipated stagnation in March, rather than the recorded 0.3% decline.

In the first quarter, the construction sector expanded by 0.7%, while manufacturing performance increased by 0.5%. Services and production saw a growth of 0.1%. However, services experienced a decline of 0.5% in March, mainly due to decreases in wholesale and retail trade and motor repairs.

The national statistics agency reported no growth in real household expenditure, as incomes continued to be squeezed by higher prices.

Speaking at a G-7 summit in Niigata, Japan, U.K. Finance Minister Jeremy Hunt said, “I believe the U.K. is on the right path, and these are figures that nobody could have anticipated just three months ago. However, we acknowledge that there is still progress to be made. Inflation remains high, and our growth is not yet at the desired level. When I discuss with my fellow finance ministers, we often address these same concerns: labor supply, productivity, and how to increase long-term growth rates so that we can meet the increasing demands of taxpayers.”

Ruth Gregory, deputy chief U.K. economist at Capital Economics, remarked in a note that the quarterly figure “suggests that low real income and high interest rates, as well as the unusually wet weather, are dampening activity.” She also highlighted the impact of widespread strike actions this year and considered the declines in government consumption and net trade to be concerning.

“There’s still no recession, but with the full impact of higher interest rates yet to be felt, it is too early to declare everything clear,” Gregory added.

The U.K. witnessed muted growth this year, with a 0.4% increase in January and a stagnation in February, narrowly avoiding a technical recession after the economy contracted in 2022.

Inflation remains a more significant problem for the U.K. compared to other major economies, with the March reading still above 10%.

In an attempt to combat persistently high prices, the Bank of England recently raised interest rates by 25 basis points to 4.5%. This marks the twelfth consecutive rate hike by the central bank. On a positive note, the Bank of England now predicts that the U.K. will not enter a recession this year, despite previously forecasting the longest-ever recession.

The Bank of England’s new forecasts expect the U.K. GDP to remain stagnant in the first half of this year, followed by growth of 0.9% by the middle of 2024 and 0.7% by mid-2025.

“The upgrade we’ve made may be the most significant one to date,” said BoE Governor Andrew Bailey in an interview with CNBC, defending the revision as a result of changes in conditional data such as financial markets, commodity prices, and government policy.

“However, let’s be honest, the level is still quite low,” Bailey added.

In comparison, the eurozone recorded a meager 0.1% growth in the first quarter, with Germany—its largest economy—experiencing stagnation.