UK economy ‘will get worse’ as growth begins to slow

LONDON – Growth is slowing in the United Kingdom after the economy shrank 0.1% in March, with economists predicting more contractions this year.

Although the economy grew 0.8% for the first quarter as a whole, just below the forecast for 1% growth, January was the only positive month of the quarter. The war in Ukraine and ensuing supply chain problems and a sudden rise in energy prices exacerbated the inflation losses, which reached their highest levels in several decades.

The British pound hit a two-year low against the US dollar after the data as traders digested the growing uncertainty over the UK’s economic outlook.

The sudden monthly contraction in March – economists had expected the figure to come in flat – is a concern for Prime Minister Boris Johnson’s government as the country’s cost of living crisis has yet to reach its peak.

“Ultimately, things will get worse for consumers,” said Heinsh Patel, portfolio manager at Quilter Investors. “Energy bills are expected to rise again later this year when the price ceiling is reassessed, while inflation proves to be more steady than expected.” .

UK inflation hit a 30-year high of 7% in March, and in April the country’s Energy Regulatory Authority raised its price ceiling by 54% to accommodate higher prices. In the Queen’s address to mark the official opening of Parliament on Wednesday, the government promised to focus on economic growth in order to tackle the rising cost of living.

Patel added that the Bank of England now faces “the almost impossible task of managing the economy out of this quagmire”.

“They are in a strong position to raise rates at the moment, but that cannot remain the case for long given the economic issues that are already starting to emerge,” he added.

The Bank of England has raised interest rates in four consecutive policy meetings as it looks to rein in inflation, and markets are pricing in another five hikes by the spring of 2023.

However, James Smith, advanced markets expert at ING, suggested that the central bank’s more cautious tone in recent weeks suggests that it will not meet these expectations, and may settle for several additional rallies before pausing so as not to exert more downward pressure. on economic growth.

Thursday’s GDP figures also showed that the UK’s dominant consumer-facing service industry took a big hit in March, falling 1.8% as consumer spending fell amid pressure on households.

Health spending is declining

ING’s Smith said a second consecutive drop in production is expected in April, coinciding with the end of free Covid-19 testing.

“Surprisingly, health output actually increased in March despite the continued decline in Covid-related activities, but it is clearly unlikely that this will continue,” Smith noted.

“Health spending has been a major driver of GDP through the pandemic, and in fact, the overall size of the economy would be about 1% smaller if production in this sector remained flat since early 2020.”

Carolyn Simmons, chief UK investment officer at UBS Global Wealth Management, has also been cautious about looking to the future.

“There is a growing possibility that UK GDP will be negative in the second quarter, in part due to consumer pressure from higher energy prices,” she said.

UK stock insulated

As concerns grow over the growth outlook in the coming quarters, investors are also considering the potential impact on the markets.

However, Simmons noted that the UK economy is not representative of the UK stock market. UBS sees FTSE 100 rally with December target at 8100; The FTSE was trading around 7,172 mid-Thursday morning.

More importantly for the UK, labor demand and business investment intentions remain flat, reducing the risk of a sharp dip in overall growth, according to Daniel Casale, senior investment analyst at Tilney Smith and Williamson.

The Bank of England expects growth to be flat in the second quarter, although Casale also indicated the possibility of a modest contraction.

“For investors, given that the large UK listed companies get the bulk of their sales overseas, global growth is really important,” Casale added.

The International Monetary Fund recently lowered its global growth forecast to 3.6% for 2022 and 2023, from 6.1% last year.

“Alongside sharp earnings-per-share gains in the energy sector, the outlook for UK corporate earnings has improved. The consensus expects 15% earnings-per-share growth for 2022, a significant uptick from less than 3% at the start of the year. Casali added.

“At the very least, the company’s increased earnings (and cheap valuations) should limit the stock’s slide in the UK in the current volatile market conditions.”