Laith Khalaf, head of investment analysis at AJ Bell, comments on the latest GDP figures from the ONS released this morning.
“The UK economy has now recovered to its pre-pandemic level, but momentum seems to be ebbing away, and recessionary forces are gathering. GDP came in at 0.8% for the first quarter of the year, a little below forecasts. What is more concerning is that almost all of the growth was registered in January, and March actually saw a 0.1% fall in GDP.
“Household expenditure was still positive in the first quarter, as consumers took advantage of new found freedoms to go out and spend money in shops, restaurants and hotels. But that was really the calm before the storm, as higher energy prices and taxes kicked in from April. The retail and wholesale trade saw itself going backwards in the first quarter, with new car sales still struggling as a result of global supply issues.
“Government policy is also having an effect on the headline GDP numbers, as the fading of the winter booster programme and the wind down of the test and trace service reduced overall economic activity. Presumably this is something we can expect to tick up again as the next booster programme works its way through the eligible population in the second quarter, and speaks to the distortion in economic data points that is still occurring as a result of the pandemic.
“On top of higher energy prices and taxes, the UK economy now also has to deal with rising interest rates, which will serve to further dampen activity. Recession risk is therefore elevated, and while growth is still expected this year, 2023 looks like it will be more challenging economically. The markets are already looking forward to next year with some trepidation, which explains why we have seen significant falls in the pound and the FTSE 250 since the start of the year.
“The central bank is raising rates to try to take some of the steam out of the labour market, to prevent an inflationary wage spiral, but clearly there is a risk the rate setting committee pushes too hard. Controlling the economy through tightening monetary policy is a bit like trying to move a brick with a piece of elastic. It’s hard to apply precisely the right amount of force and avoid the brick hitting you square in the face.”