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UK economy on fragile ground following March GDP fall

Author: ICAEW Insights

Published: 12 May 2023

Official GDP estimate confirms that UK economic output expanded slightly in the first quarter of the year, despite declining in March.

 Latest gross domestic product (GDP) figures from the Office for National Statistics (ONS) show that UK GDP has grown by 0.1% in Q1 2023, compared with the previous quarter. The level of quarterly GDP in the UK is now 0.5% below what it was pre-COVID in Q4 2019 – which means the UK remains the only G7 economy where the quarterly measure of GDP has not returned to its pre-COVID level.

The figures released on Friday 12 May showed service sector output rose by 0.1% in Q1, following a 0.1% increase in Q4 2022. Growth in seven out of the 14 sub-sectors were offset by falls in the other seven. Consumer-facing services fell by 0.4% while all other services increased by 0.2%. The largest positive contribution to growth in the sector was from the information and communication sub-sector, which grew by 1.2%, with increases in computer programming, consultancy and related activities, and telecommunications. However, these increases were partially offset by declines in education, health, public administration and defence, and transport and storage as strike action limited activity.

Production output increased by 0.1% in Q1. This follows no growth in the previous quarter and five consecutive falls before that. The increase in production output in the latest quarter was mainly driven by an increase of 0.5% in manufacturing. There were increases in eight out of the 13 sub-sectors, with the largest positive contribution from the manufacture of basic metals and metal products, and the manufacture of computer, electronic and optical products. Falls were partially offset by decreases in the manufacture of basic pharmaceutical products and pharmaceutical preparations. Construction output rose by 0.7% in Q1, the sixth consecutive quarter of positive growth.

Within private consumption, there was no growth in real household expenditure in Q1, following 0.2% growth in the previous quarter, as household incomes continue to be squeezed by high inflation. There were increases in expenditure on recreation and culture, communications, and housing and clothing in the latest quarter. These were offset by falls in transport, and alcohol and tobacco. Net tourism is a significant downward driver of national expenditure.

UK business investment rose by 0.7% in Q1 2023 and is 3.2% above where it was the same quarter a year ago. However, the current level of business investment is still 1.4% lower than pre-COVID levels. Information and communication technology equipment and other machinery and equipment, and to a lesser extent intellectual property products, contributed positively to the growth in business investment; this was partially offset by negative contributions from other buildings and structures, and transport equipment.

On a monthly basis, UK GDP contracted by 0.3% in March, following zero growth in February. Services sector output fell by 0.5% in the month as activity was hampered by the wet weather. In contrast, production output grew by 0.7% and construction by 0.2% in March.

Responding to the figures, Suren Thiru, Economics Director for ICAEW, says: “While the economy grew slightly in the first quarter, the sharp slowdown from a strong January to a decline in output in March points to continued stagnation as high inflation and strikes stifled activity.

“The positive first quarter could be followed by a slight fall in GDP in the second quarter as the extra Bank Holiday for the Coronation and continued strike action limit activity.

“The likely squeeze on consumer spending and investment from higher taxes, and the lagged impact of rising interest rates, may mean that our growth prospects are weaker than the Bank of England currently expects.

“Against this backdrop, the Monetary Policy Committee’s decision to raise interest rates may soon look like a misstep.”

For further information, read the GDP first quarterly estimate, UK: Q1 2023 and GDP monthly estimate, UK: March 2023

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